Forex Trading During the Summer Doldrums

08/06/2013 9:00 am EST

Focus: FOREX

Forex lore claims that summer is not a desirable time to trade currencies, notes Mike Kulej of FXMadness.com, and if it is true, can this knowledge be used to a trader's advantage?

All financial markets exhibit some seasonal tendencies. These behaviors are more visible in some trading instruments, while others are subjected to less of an impact. Generally speaking, these patterns are considered important enough, that an entire "science" of trading was developed, which deals with this phenomenon. That is cycle analysis, and there are market participants who consider this kind of trading the only valid approach.

These seasonal tendencies are most visible in physical commodities markets. There are good reasons for that. For example, grains (DBA) tend to be cheapest around harvest time, since this is the period of the year when supply is most plentiful. Natural gas (UNG) is typically most expensive during winter, when demand is the highest. Stock market traders surely heard about the "presidential election cycle" as well as the "Santa Clause rally." These are all examples of seasonal patterns.

Currency markets are not immune to these forces. Granted, since forex is affected by many more influences, these tendencies have much softer basis than those in commodity markets (DBC). The sheer size of FX trading makes it difficult for any one set of circumstances to affect the price behavior repetitively. Even though, there are observable, proven times of the year, when things are different. Enter the summer slowdown.

Summer slowdown takes roots in the fact that plenty of people take vacation during this time. This includes professionals who place orders on behalf of banks, hedge funds, and other financial institutions. Since large, commercial, market participants constitute balk of the volume in forex, their absence creates drop in liquidity. Very often people left at trading desks are not the real decision makers, and do not have the necessary authority to commit the "typical" size to transactions. This causes price to behave in even less predictable manner (not that it EVER truly is).

This is demonstrated in many different ways. For example, trends tend to be shorter in duration and not as explosive. Chart patterns will demonstrate higher-than-normal rate of failures. Traders using traditional techniques like Fibonacci numbers and Elliot wave will notice that they are less reliable than during other times. News might cause wilder gyrations than the significance of this development would mandate. Virtually all aspects of trading are affected to one degree or another.

For years, these summer blues were to be expected to take place in July and August. Over last decade, however, they have become confined increasingly to the month of August, but that made them even more noticeable. That surely has to do with increased popularity of spot forex trading as well as raised level of competition for clients on institutional level.

What is trader to do? There are number of ways to take advantage of this pattern. Trend followers might want to enter longer-term trades in September, at levels just below/above August lows/highs. These moves tend to be strong and directional, as if traders, after a long rest, were very determined to make trends happen. Most recently, this simple approach has been providing very good results.

Day traders might want to adjust their methods a little bit during the month of August. For example, most targets for trades are derived using some kind of projection technique, which gives price as a specific target. That can be changed to time-based targets. Once in a position, a trade should be held for a specified period of time, like the end of current trading session. These kinds of simple changes can lower failure rate.

Summer slowdown does not have to be wasted time. If one is aware of its existence, advantage can be taken either during this period or shortly after. Of course, there is one more way of dealing with August's unpredictability. This one is sure fire and time tested-take vacation yourself.

By Mike Kulej of FXMadness.com

Related Articles on FOREX

Keyword Image
The Fabulous Shrinking Renminbi
09/27/2017 1:13 pm EST

As of August 2015, renminbi (RMB) in payments globally accounted for 2.8 percent of the total, the f...