Learn to Trade

How to Use Seasonal Cycles to Trade Forex

By Rob on July 22, 2016

Reading Time: 4 minutes

If you ask me, seasonal cycles are among the most fascinating of all market phenomena. There are many that have been in play for decades or more by now, and few things embody the psychology behind the markets better than their tendency to behave certain ways year in and year out, as seasonality often tells us. It goes to show that people, not computers or algorithms, are still what drive the financial markets, and that we humans are indeed creatures of habit.

Although not as prevalent in forex as they are across the equity markets, seasonal cycles are nonetheless in play, and can be important considerations for traders year round. So whether it’s the notion of “Sell in May and Go Away,” or the infamous September return of volatility, or even the “Santa Claus rally” in December, knowing which seasonal cycles are in play at the time of trading is crucial information that a price chart alone won’t convey.

As a result, here’s what seasonal cycles mean to you, the forex trader, a few of the more prevalent ones to watch, and one seasonal cycle in particular that’s in play now and could factor into your trading decisions in the weeks and months to come.

What Seasonal Cycles Mean for Forex Traders

I’d like to be exceptionally clear and above board about one thing right from the start: Seasonal cycles alone aren’t justification to initiate any trades, whether in forex, equities, or across other markets. Seasonal cycles can, however, provide useful validation, especially when a bit more context can help ease lingering emotions amidst tenuous market conditions, like we’re seeing this summer, for instance.

As always, though, traders should first validate the technical quality of each set-up, and only after doing so, consider any agreement (or disagreement) among known seasonal cycles.

Remember also that seasonality working in your favour doesn’t make viable any set-up that satisfies some, or even most, of your trading conditions. If a set-up doesn’t tick all of the required boxes, you shouldn’t trade it, end of story.

Now, perhaps in light of that, it seems that seasonal cycles aren’t all that powerful or useful for traders. However, don’t underestimate the added confidence traders can gain when, in addition to the technical merit of a qualifying trade, they’re also trading with historical price action on their side. That can go a long ways toward creating more confident execution, even at times when volume, volatility, and even liquidity aren’t working in the trader’s favour.

A Few, Key Seasonal Cycles to Watch

An existing trend happening in concert with known seasonal cycles can have the makings for a winning trade in any market conditions. Such scenarios will always be compelling for traders, as they offer something of an edge. These trends are not always clear cut but their regular appearance means they are worth knowing about. Here are some of the most pronounced seasonal cycles to consider throughout the year when trading:

“Sell in May & Go Away”

The age-old adage of “Sell in May and Go Away” has been popularized by the propensity for equities and the US dollar (USD) to fall throughout the summer months. Aided by the usual summertime spike in oil prices, USDCAD tends to fall during this time, with May being a highly negative month for the pair as much as 80% of the time. Traders may also have higher success rates selling USDJPY in July, for example, and buying pairs like AUDUSD, GBPUSD, and others.

September’s Return of Volatility

Traditionally marking the end of the “Summer Doldrums,” September is the month when traders return to the markets en masse and we see a resurgence of volume and volatility market wide. As a result, the widest price ranges all year tend to occur each September in currencies like the euro (EUR), US dollar, Swiss franc (CHF), commodity currencies, and others. For traders, some of the best and most lucrative trades all year can happen come September, so be sure to return from summer holiday feeling refreshed and committed to trading your strategy right down to the finest detail this time each year.

The “Santa Claus Rally”

Increased consumer spending around the holidays and corporations repatriating assets for the New Year are thought to be responsible for the traditionally bullish behaviour of the US dollar and stocks in the December/January time period each year. The “Santa Claus rally,” as it’s known, can be a strong driver of trading, with the S&P 500 Index (SPX) rising in December, and EURUSD regularly falling in January.

And an Important Seasonal Cycle That’s in Play Now

By now it’s likely more evident why the seasonal cycles impacting the markets, as well as individual currencies, are important factors for traders to watch, and as it happens, there’s one such cycle that’s in play right now. As shown below, the Japanese yen (JPY) has a strong tendency to rise starting in late-July and August.

Seasonal Cycles in Forex: Japanese Yen (JPY)

At a time when many traders, influenced mostly by the news and rumours about more aggressive quantitative easing (QE) upcoming from the Bank of Japan (BoJ), were busy buying USDJPY, we looked to capitalize on a short opportunity on the heels of a pin bar reversal pattern occurring at key moving average resistance on the daily chart. And while this position was going against the mainstream, knowing the seasonal cycle was in play and acting in our favour served as helpful validation when taking it.

Ultimately, the news and rumours were shot down days later by BoJ Governor Kuroda, and USDJPY fell sharply on that news instead. The lesson there: News is really no match for a valid chart pattern with seasonality on its side, so trade price action, and learn about the seasonal cycles impacting the currencies and assets you trade. It truly paid off for us in this case, and it can pay off for you, too.