Often in retail trading world, yearly quarters are forgotten. As monthly and yearly periods are important, the quarterly is even more! From fundamental perspective and from technical analysis stand point, there are couple very strong reasons why quarter as a time frame is the ultimate one. And why it must be observed by every trader who regards his trading seriously.
Yearly periods are the biggest – sure, but they aren’t tradable really (at least for a common retail trader). One year includes different fundamental changes and often – opposite in its impact on the markets, so a whole year or a group of several is quite difficult to fit in one bear or bull cycle. Technical analysis of the yearly period is also complicated and except open, close, high and low levels, when price approaches these once a year or even on rarer occasions there is nothing much to consider.
Fundamental aspect. So, what makes quarters so special apart from that is the biggest tradable time frame? It’s the capital flows. Corporate world accounting is based on quarters of financial year. So as biggest investment banks repositioning in to the end of the quarter or in to beginning of the new one, means that huge capital flows circulating across global markets. And all the levels, regarding ending of quarterly period, are significant from institutional trader’s standpoint of view. So it should be significant for a retail trader too.
Quarterly periods of the year are segmented in three month sequences naturally. First quarter (Q1) starts with the beginning of January, ends in last day of March. Second quarter (Q2) from April till June, Q3 from July till September and Q4 from October till December.
First quarter of the year is of special importance as corporate world release earnings trough out the first quarter (also many companies starting their fiscal year in April), so depending on technical and fundamental context, ending levels of the first quarter (Q1) may be as much important as December’s, closing level of the previous year! That’s why often first quarter sets up direction for the rest of the year.
Technical analysis should be concentrated on most important price action (PA) aspects, such as: high, low, opening levels, middles, breakout and rejection swings of the most recent periods. Other technical analysis tools, which require much older data - dozens of previous periods to calculate in, like moving averages or various indicators (RSI for example) are not very suitable for such big time frames.
Precise monthly or quarterly ending level may be confusing to determine when it happens during the weekend or holidays. Having in mind, that interbank is never really closed and that USD is world’s reserve currency – Federal Reserve System opens the month at 1st day 00:00 EST. And that is the exact reference point for quarterly and monthly period calculation.
Figure 1.1. EUR/USD monthly chart. That’s how I mark quarterly periods in monthly charts. This way I have both – monthly and quarterly levels on the same chart.
When trading – don’t expect for price to react to quarterly level immediately and to the pip, especially if there are previous price reactions around that level already. Daily, weekly or monthly period closing above or below is more important than intraday reactions to the level.
Some particular weeks are especially important as they mark ending of the month and especially – ending of the quarter. If important quarterly levels are near by – the battle for these will come. Trader cannot be sure if the level will hold, but he could bet on very probable test of the level and these cases are very often in to the ending of the quarter or right after the close. So trading decisions should be set up accordingly.
Figure 1.2. 2980’ties was the exact middle of the previous (Q4 2012) quarter, also confirmed by monthly price action (several monthly closings/openings in a row). This level got lots of action in to the ending of Q1. It’s very notable on daily charts.
Figure 1.3: EUR/USD major quarterly levels to track in upcoming months (Q2 2013). Previous quarter (Q1 2013) made higher high (HH) but failed to stay above resistance at 1.3340, and didn’t closed below intermediate support at 1.2800. Major quarterly support at 1.2670 still to be tested, but for upcoming quarter (Q2) range is set in between 1.3340 and 1.2670. Wide consolidation is to be expected, unless one of the major Q levels gets broken. It is notable from the daily chart, how frustrating sometimes price action gets around quarterly levels. That’s why analysis of such levels should be done on closing basis of D1 and W1 periods.
If quarter closed bullish in a bear trend or vise versa - expect wide choppy range to form in the next quarter and especially in the first part of that quarter.
Interactions between technicals and fundamentals are especially important in quarters. It is very important to appoint key fundamental events to every quarter and fallow if the new ones negate the previous fundamental developments.
Even for a high frequency intraday trader is useful to know if quarterly levels are near by. It’s always good to know if you are trading against major support or resistance.