News & Updates

Seasonals Trading System Performance Q1 2011

As promised, here’s a look at the performance of the trading system I’ve been running based on seasonal patterns in the forex market as outlined in my Opportunities in Forex Calendar Trading Patterns research report. Unfortunately, I didn’t keep track of daily open equity values specifically, so I only have actual numbers where closed-trade equity is concerned. Aside from the month of January, the figures don’t diverge too much. Below is a chart of that based on a 100 starting point. I’ll start tracking the open equity moving forward.

Unfortunately, the system was on the wrong side of the big euro rally in January, which was counter to the dominant seasonal pattern. Those positions started rolling off in early February. As you can see, things have gone much better since then.

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Forex Seasonals Coming Up Big So Far

Do you know the seasonal patterns which tend to play out in the forex markets? If so, then you were well positioned to take advantage of what we saw out of the likes of the dollar and the euro over the last couple of months. Both moved in accord with their historical tendencies during January and February.

Take a look at as this chart of how EUR/USD tends to perform throughout the course of the calendar year.

EUR/USD seasonal performance through the year

What the chart is telling you is that if you sell EUR/USD during the first 8 weeks or so of the calendar year, and hold that position for a month, you will generally make month. The chart includes data for 1997 to 2008 (pre-1999 data is from the old ECU to which the EUR was pegged at its launch). It doesn’t include 2009 and 2010, which would make things even more negative as the chart below shows

EUR/USD Chart showing Jan 2009, 2010 performance

And here all the market commentators were talking about what was happening with Greece as the main driver of the decline in EUR/GBP the last couple months. While that certainly was contributory, there’s no denying that January and February have a seasonal tendency to move lower anyway. The current news and psychology in the market has been riding along the seasonal pattern.

So where to from here?

Well, the dollar tends to stay on the positive side through about the first quarter of the year, though the latter part of that span is not quite to strong as what is seen in the first two months. As we progress toward the middle part of the year the dollar takes on a comparably negative bias as the positive one seen at the outset of the year.

Look at what’s forthcoming in USD/JPY.

USD/JPY seasonal performance through the year

Week 23, which falls in June, is about the start of 2-3 month stretch over which USD/JPY tends to perform badly. That wouldn’t be a time one generally is going to want to be long.

A little more immediate is the strong tendency for GBP/CHF to rally in the month of April. Between 1982 and 2008 the cross was up 70% of the time at an average rate of 1.73%. Overall, the cross has averaged a gain of 0.78% during the month. And those figures don’t include a 3.3% gain GBP/CHF experienced in 2009.

There are loads more seasonal patterns in the majors and major crosses, from monthly down to daily. Don’t ask me to tell you why they persist. I can only hazard a guess about what the drivers may be, but really I’m just reporting what the numbers say. And you definitely should be aware of these patterns. You’re not going to base your trading decisions on them alone, but they may help you improve your trading odds by biasing you in the right direction.

The data above comes from the research report Opportunities in Forex Calendar Trading Patterns, which I put together after I started noticing these patterns while I was doing my own trading. I have definitely used them profitably since.

Reader Questions Answered

The Relationship Between Stocks and Forex

I was asked a question by someone on my mailing list yesterday about the relationship between the forex and stock markets. Normally I include the text of the person’s question, but in this case English is not the person’s first language and the inquiry is fairly lengthy, so I’ll skip that in this particular instance. The bottom line is that like many folks this individual is wondering about why the dollar falls when stocks rally, and vice versa.

Following the Patterns and Relationships
As a professional forex market analyst I spend my days watching the all markets (not just forex) and seeing the various interactions between them. Some are subtle, fleeting, and likely only to be spotted by those looking specifically for them. Others are broad and obvious that anyone can see. The whole stocks up/dollar down pattern we’ve seen for some time now is definitely in the latter camp. Even the media is aware of it. 🙂

Back in June I did a presentation on cross-market analysis and trading at the L.A. Traders Expo. I was asked the question then what market tends to lead the rest. My answer was that it varies from day to day, and sometimes even hour to hour (for example the bond market has been tipping off dollar moves the last couple days), but in very general terms it tends to be the forex market which moves first, fixed income (interest rates) which follows second, and equities bringing up the rear (commodities probably falls in the fixed income area on the timeline, but they vary).

Risk Aversion and Carry Trade
The relationships between the markets varies considerably, though, so don’t make the assumption that what’s going on now will persist. Right now we have a situation where a couple of things are contributing to the inverse relationship between the dollar and stocks. One is the general risk aversion/flight to quality trade in which nervous market participants will tend to move money into the dollar for safety.  This isn’t as dominant a theme as it was a few months back, but is still a factor.

The other is the fact that the dollar has to a certain degree supplanted the yen as the carry trade short currency of choice (meaning the one that gets borrowed to be converted into a higher interest bearing currency). The carry trade is a highly risk sensitive position. Those trades will be closed when people are worried about the global economy partly on a safety basis and partly on the view that the higher rates could come down.

Seasonal Patterns in Action
Also keep in mind that so called “seasonal” patterns can influence things. This time of year has generally been a bearish one for stocks, but it has also been that way for the dollar (see Opportunities in Forex Calendar Trading Patterns). That creates an interesting conflict between the usual patterns. So far in September the dollar pattern, because of the inverse relationship, has cancelled out the usual bearish action we’d expect in stocks this month.

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Forex Market Seasonal Patterns – Really!

Much of the time, when the idea of seasonal patterns is brought up in trading and the financial markets it is related to commodities. The commodity market, with its production cycles (crop harvest times, winter heating, summer driving, etc.), has some very obvious seasonals which impact the way prices move. This is all well documented.

The foreign exchange market, however, is not generally one where people thinking about the seasonal impact on prices. They exist, though. I’ve done research on the subject confirming that.

Several years ago I noticed an interesting pattern in EUR/JPY by which it rose regularly during a certain month of the year. I was able to use that knowledge profitably and it got me wondering if there were more such patterns. I wasn’t really expecting to find any.

Needless to say, I was surprised when calendar patterns showed up all over the place – in many different currency pairs, at all different times of year, and in both short and longer term timeframes. Knowing that information was something many traders would probably find extremely valuable, I put together a full 175 page research report – Opportunities in Forex Calendar Trading Patterns.

That was back at the start of 2006. I updated Opportunties at the start of 2007, but decided after that to retire the report. Toward the end of 2008, though, I started getting regular inquiries about it – traders wondering if it was still available. After asking around and finding out that there was definitely interest, I decided to revive the report.

Actually, I went a bit further than that. I completely overhauled and expanded Opportunities. It’s now 260 pages and even more useful than the previous editions. It covers all of the majors and major crosses, plus I created a set of individual indices for the major currencies (similar to the Dollar Index) to look at the general patterns of individual currencies outside of specific pair relationships. If you trade forex you’ll want to take a look for sure.

I’m not going to say I understand why all these patterns take place. It obviously has something to do with capital and/or trade flows during different times of year. I’ll leave the explanation of that sort of thing to someone more in the know on the subject than I am. I just want to know it’s going on so I can put that information to use in my trading.

Seasonals, of course, aren’t guarantees that the market will trade a certain way at a given time of year. What they can do, however, is help you put the odds in your favor. That’s really half the battle in successful trading.

If you want that extra edge for your trading, I definite encourage you to check out my forex seasonals research report.

P.S.: Much to my surprise, I was just contacted by a group in Singapore about getting copies of the report for libraries, companies, etc. That was quite interesting, especially since I haven’t really done much by way of getting the word out yet.