Surely you’ve heard the age-old adage in the markets that says “Sell in May and Go Away,” right? Perhaps you even follow that advice, and if so, you’re likely not alone, as it’s once again the time of year when traders and investors, especially those who deal in equities, are at least considering some strategic changes with the infamous May-to-October “slow period” upon us.
But does the “Sell in May” motto work in the forex markets? Honestly, recent data would suggest that it doesn’t hold true, and perhaps just as notably, Sell in May hasn’t been anything to bank on across the equity markets throughout the last 5 years, either!
There are other forces in play, however, that traders should account for, so while you don’t necessarily have to follow the Sell in May crowd over to the sidelines for the summer, do take a look at what you’re trading and how changes in the May-to-October market environment may impact your strategy and the performance of your trades. Here’s what you need to know in order to do it…
Let’s be clear that the whole Sell in May motto isn’t some baseless theory that just sticks around because it rhymes! Actually, The Stock Traders’ Almanac and plenty of other reputable sources have tracked the phenomenon since the 1950’s, and while conclusions vary, the Sell in May philosophy would’ve worked—for stocks, at least—as recently as 2011 and 2012.
Indeed, this is a theory that’s far from dead, but nonetheless, as we put it to the test with regard to forex, other factors besides seasonality play a part, and these are the considerations that top that list:
Equity/FX Correlations – Perhaps the #1 reason that Sell in May doesn’t universally apply to forex is because it’s an equity phenomenon, and not all currencies are closely correlated with equity markets. Some certainly are, including commodity currencies like the Australian (AUD), New Zealand (NZD), and Canadian dollar (CAD). Correlation is lower for the Euro (EUR) and Swiss franc (CHF), however, and the Japanese yen (JPY) is a special case in that it’s negatively correlated to Japan’s Nikkei Index, but closely tied to the performance of the S&P 500.
For traders, all of this means that it’s crucial to know what you’re trading, and if there’s a strong equity correlation involved. If so, and the Sell in May phenomenon were to affect equities that particular year, then it would also be likely to have an impact on your trading, so be forewarned.
Economics & Geopolitics – Even renowned studies on the Sell in May theory have noted that a larger number of important economic and geopolitical events—the kind that negatively impact equity and currency prices—have occurred in the May-to-October period as compared to November through April. For that reason, some question the validity of Sell in May, arguing instead that the news, not the May-to-October seasonal effect, was to blame.
Indeed, no forex trader would ever dispute the impact of news and economic data, and with modern-day debt problems, a potential rate increase by the Federal Reserve upcoming, and easy-money policies in play in Europe and Japan, we have the makings for price action in the forex market that could overpower any headwinds caused by the Sell in May phenomenon, even if it were to prove a factor this year.
While the above factors and others suggest that you don’t have to run for the sidelines just because of the Sell in May phenomenon, you do have to recognize that some traders and investors will! Thus, by the time those “Summer Doldrums” of July and August roll around, low-volume, low-volatility trading conditions are more likely to prevail, and you may need to adapt your strategy as a result of that instead.
Trade Smaller Size with Tighter Risk – Consider trading only half your normal size in difficult conditions, trail stops closely behind, and take profits quickly on winning positions. Be content to take small wins at a time when many traders are content to not trade at all.
Focus on Proven Range Set-ups – Breakouts turn into fakeouts more often than not when the markets lack the volume and conviction to really push through key support or resistance levels. As a result, look for established ranges on the charts and consider trading reversals off of key range boundaries, when they arise.
Trade Higher Time Frames & End of Day – While the sharpest moves are likely to occur intraday on the heels of news and economic data releases, the smoothest trend moves will be seen on longer-term charts like the daily or higher, and traders can avoid news-driven whipsaws by entering end of day once those announcements have had a chance to be digested by the markets.
So the infamous mantra of “Sell in May and Go Away” lives on in the markets, but for equity and forex traders alike, it’s not that some dark curtain falls over the markets come May 1. Opportunities will remain throughout the summer, but they simply may require even more attention to risk, and more careful entry and exit strategy.
Perhaps even more important for FX traders than the whole Sell in May phenomenon, however, is that the summer months are known for low volume and low-volatility trading conditions that challenge even the most experienced traders. So as many traders take summer holidays and step away from the markets, those who are left must tread carefully, yes, but they don’t have to “Sell in May and Go Away,” as the saying goes.