In this article, I'm going to talk about FX seasonality cycles and how they can improve your trading activity and why it should not be ignored. There is no mystery that the world is full of cycles and we're governed by them and the financial market are not exception of this rule. The majority of traders will either use technical analysis, fundamental analysis or a combination of both. But the seasonality cycles will bring in a new dimension in which you can analyse the market. The time element such as the time of the day, the day of the week, the month of the year could also play a big role in how certain FX pairs may behave. So when you focus your attention purely on price and time without the noise of indicators you may notice that some pattern shows up during certain time and this patterns are known as seasonality. Seasonality are a predictable change in price that repeats every day, week, month, year at the same period in time.
This seasonality cycles will only give you the tendency of an particular currency pair to bottom or top or rally or fall, at certain point in time. The seasonality is just an average so in this regard it's better not to use it in isolation but rather in combination with your technical analysis as the market can deviate from this seasonality cycles.
There are seasonality not only on a monthly basis but on every time level this seasonality pattern reoccur and are visible so in this regard we're going to start to look on every time level, and what is more important I'm going to try and apply this seasonal cycles to current price action and see if we can spot some trades.
- Intraday Seasonal Trends.
Before looking on how this seasonality cycles portrait the market it's important to be aware that we can divide our trading day into four major trading sessions: the Sydney session, the Tokyo session, the London session, and the New York session(see Figure 1). During each of this sessions liquidity is not distributed uniformly and this is one of the cause why this seasonality cycles appear on an intraday basis.
Figure 1. Major Trading Sessions.
Next we're going to look at two types of intraday seasonality cycles that will help us to step up our FX game:
- Intraday Volatility tendency;
- Intraday top/bottoms tendency;
- One at around 7:00-8:00 GMT, with the maximum ATR(Average True Range) around 14 pips;
- The second one between 12:00-14:00 GMT, with the maximum ATR around 18 pips;
So, how is this information going to help you? If you're daytrading it will help you to time your trades much more better, to enter the market only around the time of the day when the ATR is at pick and it can show you a realistic expectation for the trade and how far away your TP should be.
In Figure 3 you can have a look at the 10 year intraday seasonality cycles and EUR/USD top/bottoms tendency. Usually it can be seen that the major intraday bottom is around 12:00 GMT right before the New York session so if your strategy for any given day is generating a buy signal this seasonality charts will help you time the market much more better so you'll be better off to wait for the 12:00 GMT before starting to buy. In the same circumstance you should avoid buying at around 8:00-9:00 GMT as usually around that time EUR/USD produces an intraday top.
Figure 3. EUR/USD 10 year intraday seasonality cycles. Top/Bottom tendency.
Lets apply what we have just learned and have a look at the last trading session (see Figure 4). As you can see I'm not choosing some random dates jut to fit in this seasonality cycles but instead we look at recent price action and see how the seasonality can help us in our trading operations. Figure 4 represent the price action from last week and in particular we're going to focus on the action from Friday 08.08.2014. Although the market has bottomed ahead of the usual 12:00 GMT intraday seasonality cycle by using the information from intraday volatility tendency which suggest that we have a pick in volatility at 12:00GMT (see Figure 2) and the intraday Top/Bottom tendency (see Figure 3) we could have bought EUR/USD at 12:00 GMT as also the technicals where suggesting we have broke an important level which should act as support.
Figure 4 EUR/USD 1h chart
- Intra-week Seasonal Trends
Figure 5. EUR/USD Volatility in pips per weekdays.
Figure 5 shows the EUR/USD ATR per weekdays calculated since beginning of the year and so far Thursday is the best performance day for EUR/USD in terms of pip movement, followed by Friday and Wednesday. Another major tendency that this seasonality cycles shows is the fact that EUR/USD will most likely will set the high and the low of the week either at the beginning or at the end of the week(see Figure 6). One way we can apply this information is if the currency pair is in an strong uptrend we can assume that if Monday we establish a low will likely hold through Friday and vice versa for an strong downtrend.
Figure 6. Frequency of EUR/USD Highs/Lows per day of week.
- Months Seasonal Trends.
- EUR/USD typically bottoms in mid-February and then moves higher into mid-March where we see a short-lived pullback followed by another rally into the end of April.
- Jun is another month where EUR/USD start bottoming.
- August is one of the worse month for the euro with the biggest decline but it's followed by a quick rebound in September.
- Earlier September is the second best month for euro.
- After October this seasonality cycles diverge and are less reliable.
Figure 7. Euro 5,10 and 15 years seasonality cycles.
The forex market is well suited to seasonal trading and this increases the chance of a price move once a move has started in the direction of the seasonality cycle. Trading seasonal trends also offers advantages because you're trading in the direction of line of least resistance. The seasonality cycle are just another toll in the trading arsenal of any professional trader that you have to use in combination with your strategy. Although the seasonality pattern might not be repeated all the time being aware of seasonality cycles can help any forex traders to understand where the probabilities lie.