Forex Trading Library

Trading Seasonality: Should Traders Take Breaks?

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Is taking a ‘time out’ good for your trading psychology?


Taking a break from trading can help you reset your mind and evaluate your performance. You can use the concept of trading seasonality to plan your breaks and optimize your strategies. Trading seasonality refers to the patterns of market behavior that vary depending on the time of the year. For example, some markets tend to be more volatile or more bullish during certain months or seasons. By understanding these patterns, you can adjust your trading style and take advantage of the opportunities that arise. You can also avoid trading during periods of low liquidity or high uncertainty, and use that time to review your progress and improve your skills.
 

Day trading can see momentum being sucked dry and it could only create small profits and losses as the market is not moving as vastly. This could affect morale and concentration. 

Errors are easier to make when the market is putting you to sleep, as breakouts are more difficult to find and are more dramatic when they occur. Remember that trades don’t necessarily need to be made every day, especially with minimal volume and price movement. 

So, do the months of the year really affect the markets? 

How about summer vacations?

Many traders have followed the strategy of “Sell in May and Go Away” for years, believing that the summer months are usually sluggish for both the forex and the stock markets. June until August typically means taking a break, rejuvenating, and coming back with a clearer mind set. This applies more to Northern hemisphere countries since the majority of foreign exchange flows originate from cities such as London and New York. 

Even governments take a summer sabbatical. The UK parliament’s break consists of six weeks, usually starting from the end of July. 

Every year the US Congress and Houses recesses for the month of August. This has been a tradition that dated back to 1791 as congressional members were not full-time politicians.  

And as we close in on the year end?

The winter months may seem a lot different. Even though there is an obvious holiday period at that time of year, Christmas is usually busier due to the final rally towards the year end.

It has been known that the end of December has shown to be a good time to buy certain stocks, for the possibility to be poised for the rise early in January. There’s another advantage as well, as many investors start to sell stocks at year end, especially those that have declined in value. Therefore, the last trading days of the year can offer some bargains. 

Does the season affect the psychology of traders?

Summer is considered to be the most difficult trading period, along with the run up to the Winter holidays. At this time, many traders separate themselves from the market to take a break. This leads to lower liquidity which in turn pushes volatility higher. Price behaviour then becomes less predictable. 

You can look to the signs in volume as there could be reduced ranges on instruments traded. Rather than 60-80 pip moves, markets tend to move 10-20 pips or the equivalent in points for stocks, indices etc. 

When it comes to news reports, they are usually less juicy as the market moves are based on predictions or speculation rather than actual tangible news events.  

However, this is how it works in theory, so does the volatility and liquidity of markets really change in summer? Do the performances of financial instruments depend on the seasonal factor? Are there cyclical seasonal patterns in the instruments of different markets? 

Should the seasonal factor change your approach to trading?

Most online resources describe Summer and the New Year cycle as the most unpredictable trading period. 

No matter the seasonal approach, small speculators and some large traders whose plans are unknown remain in the market. This could be one of the reasons for the constant unpredictable breakouts of resistance and support levels. 

Seasonal analysis allows us to see relative patterns of growth or decline. 

We can clearly observe cyclical nature and psychological regularities on the market. While technical analysis helps to identify strong psychological resistance and support levels, statistical analysis will help to identify patterns of the market. 

What markets can be affected?

Oil and Natural Gas demand heightens during winter months as the demand for energy increases. Subsequently, summer periods create more demand for electricity, as air conditioners see a sharp increase in usage.   

Energies are unique because in addition to geopolitics and speculative factors, their prices are greatly influenced by direct demand from sectors such as the transportation and aerospace industry. 

The winter volatility in oil and natural gas commodities is partially due to the fact that these energy sources are largely taken out of the ground in the spring and summer months, and stored for use over the autumn and winter months. 

Are Oil and Gas big movers?

Because Gold is mined year-round, supply remains relatively steady. However, apart from the recent geo-factors relating to the Covid-19 pandemic, past years saw gold traditionally jump towards the end of the year. 

During the Autumn months is the Indian wedding season, with its heavy influence with buying gold. 

After that comes the Western holiday season, where gold jewellery demand surges for holiday gifts. 

This is followed by the Chinese New Year in February, which usually leads to further demand. So this is important to keep an eye on as the metal market can be quite volaitle. 

How About Stocks?

Every year, stocks tend to repeat seasonal trends. It is more obvious that some individual companies such as large agricultural corporations are affected, due to the ability to produce more of a stock pile in the summer months.  

However, sectors such as retailers or technology companies do not show seasonal patterns since demand usually comes in the form of a news release or an upgrade to their latest product. 

Therefore, trading with shares of individual companies, investors should also take into account the specific features of their activity. 

In addition, the end of a quarter is usually a significant period, as earnings season, annual reporting and dividend distribution periods could bring a sell-off into the market. 

Does Forex Remain the Same?

Foreign exchange reacts to the seasonal factor even less than most other markets. In the case of commodities for example, there is at least a partial influence of growth in consumption. However, currency trading in terms of the level of volatility due to ongoing fundamental developments is essentially the same at any time of the year. 

The effect of seasonality trading on currency pairs seems highly exaggerated. Local price changes during national holidays can happen, but there is no clear pattern. There is also no trend of volatility or flat period in the summer or winter. Therefore, investors will get a lot more out of the market if they rely on more serious fundamental factors. 

In contrast to commodities and stocks, the values of currencies are based upon the policies of central banks and domestic economic performance.  

All in all, it generally depends on what asset or instrument the trader is investing into. Studies have indicated that during holiday periods, volumes can differ resulting in interest levels peaking and dying down. 

Therefore, ‘taking a break’ generally comes down to your own perspective. The seasonal factor should not put you off trading if you see an opportunity in the market. After all, sometimes the best time to enter the market is when there is less volatility.  


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