Summer Forex Market Dont Be Complacent

Liquidity thins during summer forex trading as many in the Northern Hemisphere take vacations. However, this does not mean there will not be trends and/or volatility. So, don't get lulled during the summer malaise as history shows to be alert as trading opportunities do arise, even if markets settle into ranges rather than trends.

So how does a forex trader go about trading during summer markets? There is no hard and fast rule as history has shown markets can move and trends develop when it is least expected. One characteristic is that US afternoon sessions tend to be much quieter than usual. Forex trading activity, in general, peaks during the European-North American session and then tails off during the U.S. afternoon session. This is the typical pattern but the U.S. summer session is even thinner than usual. In addition, Friday sessions tend to be thinnest, especially after Europe goes home and traders look for early exits from the market. This can also be seen in the Global-View.com forex forum, which tends to be a good reflection of forex market behavior.

Last summer was an unusual one as it setup the start of the crisis that sent global financial markets reeling and on the brink of collapse. For example, the EUR/USD traded a range of 1469 pips, 1.6040 (record high) set July 15, 2008 to a low at 1.4571 on August 26. The net change for the dollar for July-August was +7.5%. GBP/USD traded a high of 2.0157 on July 15 to a 1.8171 low on August 29. This was a 1986 pips range and +9.6% for the dollar vs. GBP. USD/JPY traded a more subdued range as JPY firmed on its various crosses. USD/JPY traded a high of 110.51 and a low at 103.77, which was a 674 pip range. The net dollar change for the summer period was +3.3%.

By contrast, the summer of 2007 showed tighter ranges and smaller net changes. EUR/USD traded a 493 pip range and the net dollar change was -0.8%. GBP/USD traded a 707 pip range and its net dollar change was a mere 0.4%. USD/JPY traded a wider 1297 pip range and its net change was -6.0%. While the more modest ranges in EUR/USD and GBP/USD might be more typical of summer markets, there was enough movement (e.g. USD/JPY and JPY crosses) to provided opportunities to trade.

The point of this analysis is to show that thin liquidity does not mean the market will not move or trends will not develop. While the summer of 2008 may not have been a typical market, it illustrated the danger of being complacent and that trends can develop despite thinner than usual summer liquidity. The summer of 2008 setup the gyrations in global financial markets in the months that followed and history will likely show these were once in a lifetime moves. Looking at the summer of 2007 shows there were tighter ranges in the eur/usd but a wide range for USD/JPY. Activity in the forex market generally peaks during the European-North American session and then slows during the U.


Copyright (c) 2009 Jay Meisler