Forex Trading Seasonal Patterns

The focus of this article is on the start of the New Year and start of post-summer forex trading. The thinnest time in terms of liquidity is generally the last two weeks of the year and the second thinnest time is the last two weeks preceding the U.S. Labor Day holiday. The start of post-summer trading is said to begin on the day after Labor Day. The goal of this article is to highlight a pattern I have seen in the currency market often at the start of these periods.

The reason this is important is that there are often sharp moves in the forex market during the first few days of the year and post-summer as forex trading slowly returns to full liquidity and traders set-up positions for the period ahead. It generally takes days for the forex market to reach full liquidity and movements can be exaggerated during these times. This follows a period where positions are often reduced and risk appetite is cut back. My experience is that the these periods often see sharp trend movements followed by false starts and whipsaws. This is important because forex traders (and other markets as well) often get carried away with what appears to be rapidly developing trends and then are forced to run for cover when they quickly run out steam and reverse. This is not always what unfolds but something to keep in mind just in case.

An example is the current market where the dollar has come under sharp selling pressure out of the box at the start of post-summer forex trading. It is day three today following Mondays Labor Day holiday and the currency market has broken out, sending the U.S. dollar to new lows for the year-to-date vs. several currency pairs, such as the eur/usd. While there appears to be legs to these currency moves as dollar weakness has been broad based, it remains to be seen whether this will turn out to be one of those quick trends that quickly aborts or one that follows through.

The point is history has shown a need to be cautious during the first few days of the New Year and start of post-summer forex trading. There is more than enough volatility in the first few days to keep a trader occupied but try not to get carried away with trends that often see a quick end. This does not suggest looking to fade or take the other side of an apparent trend move, but to be aware that they often do not follow through. While there are exceptions to the rule (the current post-summer market may be one), my rule of thumb argues for some caution during these periods. Note, I am only drawing on personal trading experience and not using empirical data to support my view.


Copyright (c) 2009 Jay Meisler