The seasonality of the Forex market is a frequently neglected aspect of trading with legitimate uses by speculative traders, and this article attempts to highlight some dynamics and create a strategy apart from key market trends. In this article we hope to discuss a new generation of trading techniques and understanding of a key facet of the Forex market.
What is seasonality in the Forex market?
In simple terms, the seasonality of the Forex market is the tendency of currencies to move in repeatable and relatively predictable patterns over time. When commenting on seasonality, most guides will refer to certain monthly trends that happen during the calendar year. A pertinent example is the tendency of the Japanese Yen to revalue itself at the end of that nation’s fiscal year. Even so, these patterns are quite difficult to operate as they are somewhat unpredictable and have little legitimate use by the trader in the short term.
Instead we will examine a trend that is much more useful in a short-term context: the behavior of currencies to set highs and lows in a weekly context. The relative predictive ease is obviously what interests us as Forex market traders; if something repeats itself, in theory it is simple to speculate from such repetition.
Forex Market Trends and Weekly Trends
Years of Forex market reports show that currencies quite likely set their highs and lows at the beginning and end of the trading week. Intuitively, this makes sense: If a currency is on a fairly consistent uptrend, its Monday low will probably hold until Friday and the opposite should also be correct. In addition, the representative currencies of Europe and North America also tend to show large price movements towards the end of the week.
Of course this is quite interesting in all its dimension, but the first question that comes to mind immediately should be obvious: How do we use this in our trade?
Parameters of Seasonality Strategy in the Forex Market
If we wanted to speculate that Monday’s highs or lows would hold, we would probably be estimating that the currency will continue in one direction during the subsequent trading week. There are some ways to do this, but sometimes the simplest solution is better when it comes to trading strategies.
Income Parameter: On Tuesday, set an entry order with buy stop at Monday’s high level, an entry order with sell stop at Monday’s low level. We will keep these entry orders with buy and sell stops throughout the week unless we have already taken a long or short position with the exchange rate respectively.
Stop Loss: The entry order with the opposite stop will take us out of a certain position and establish a trade in the opposite direction. This will happen unless an order has already been activated in the other direction during the previous trading week. In other words, the strategy goes long on Monday’s maximum level but subsequently reverses its direction on Monday’s minimum level, there will be no stop order placed on the next short position.
Utility socket: None
Output Parameter: Close as close to the close price on Friday as possible.
FXCM offers the possibility to download an automated weekly trading software, establishing a strategy based on the weekly seasonality.
You can download and install FXCM’s strategic trader platform, along with the WeeklySeason.fxd file when you are sure whether you would like to import the strategic advisor into your platform.
Seasonality Strategy Results in the Forex Market
If we use this weekly strategy at the frequently volatile exchange rate and remarkable speed to generate trends such as that of the pound sterling against the Japanese yen, the results are somewhat impressive.
Despite the remarkable periods of poor performance, in a hypothetical context the strategy performed quite well with the GBP/JPY moving back up to the beginning of 2001. Although past performance is never a guarantee of future results, such simple and intuitive trading parameters equally show promise at other exchange rates.
Uses for every trading day
Now that we know about the tendency of currencies to set their highs and lows at the beginning and end of the week, we can use this as a class filter for our own trading strategies. If a trend-based trading system is used, a trader may want to evidence whether a currency has broken its maximum or minimum level at the beginning of the week and adopt a trade in that direction. If a trader uses a more range-based trading system, he can also look for the currency’s ability to establish a particular direction after a break in the maximum or minimum level at the beginning of the week.
Although nothing is perfect, research shows that a trader is likely to have a better chance of success if he trades on general seasonal trends.