The majority of foreign exchange traders would agree that one should avoid engaging in any foreign exchange trading during a holiday season due to the market’s low liquidity. Yet, there are numerous seasonal effects which one must be aware of. By conducting a forex comparison it will be shown that one can take advantage of these different seasonal anomalies and participate in profitable trades.
What is the January effect?
A lot of monthly data does not include January because of the so-called January effect. This effect is that the traders on the market come back after taking the December off with a vengeance. At this time the market is volatile and liquid. It is not only the retail traders that return to trading at this time but the large companies and the banks. The retail traders that are coming back took off the December period because of the holiday season and overall low liquidity of the market. You can benefit from this seasonal effect by getting in on the high volatility and liquidity.
What are pre-holiday rallies?
Just before the holidays start you should look at the market. However, when you are taking advantage of this you have to be careful with the broker spreads. Some brokers start widening their spreads in anticipation of the low holiday trade volumes a few days before the holiday. If your broker is still offering good spreads you should look at trading just before the holidays. At this time many large market movers are looking to get the last trades in before they close. This can create a good amount of liquidity on the market and some volatility.
Comparing the foreign exchange market on a monthly basis
The forex market is open all year but this does not mean that every month will be a good month. Historic foreign exchange comparison has shown that certain currencies do not do well in certain months. Overall the market tends to dip during September and this could be down to holidays in the Northern Hemisphere. September is the month when a lot of people in this hemisphere go on holiday and make the most of the summer.
Of course, you should look at the currency you are trading as well. The Euro has shown highs during mid-March, July and August. However, there are declines during September, October and the beginning of April. The Pound has highs during early April, early August and early November with lows during September, mid-May and the end of November. The US dollar rallies in mid-February, the end of March, early May, mid-June, mid-August and November. However, there is a decline in December, September, mid-March, the end of May and July.
You can greatly benefit from these seasonal changes by trading these currencies during the high times and using other currencies during the low times.