How Seasonal Trends Effect FX Markets?
Many forex traders depend on either fundamental analysis or technical analysis in their trading. The savvier among them try to combine both in making predictions about the direction a particular currency is going to follow in the future.
Fundamental analysis depends on the study of underlying economic factors that affect currency markets. Technical analysis is based on the premise that past price action can be used to make predictions about the future price action in forex markets.
If you have been trading stocks, you must be familiar with the term: The January Effect. It has been observed over a long period of time that stocks tend to perform very well between the last week of December and the first week of January.
The explanation of the January Effect is simple. During the last few days of the year, many investors are concerned about their tax returns. They try to realize capital gains or losses to file their tax returns. Many corporations also use the end of the year to face lift their balance sheets favorably at the end of the year.
Now the interesting fact is that seasonality is not common to the stock markets. Forex markets also show seasonal effects. Seasonality is defined as a trend or pattern that occurs at some particular part of the year.
The January Effect also takes place in forex markets due to the same reasons. Many investors who are adjusting their stock positions try to convert their local currencies into dollars at that time.
However, dollar shows stronger January Effect in some currency pairs as compared to others. There is a summer effect also. It has also been observed that dollar shows a summer seasonality when it tends to rise in USD/JPY pair and USD/CAD pair in the month of July and give back its gains by August.
There are many other seasonal patterns in currency pairs. However, it does not mean that you should believe in these effects blindly. Just keep them in your mind when trading.
Seasonality in currency pairs only means that there is a strong probability that during a particular time of the year, the chances of a particular currency pair going up or down are high.
Forex traders should keep these seasonal patterns at the back of their minds while trading during that period.
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