You as a forex trader can either use fundamental analysis or technical analysis in studying the forex markets and making predictions about the future. The savvier among you will try to combine both in making predictions about the future direction a particular currency is going to follow.
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 why this effect takes place is quite simple. At the end of the year, many investors try to realize capital gains or losses to file their tax returns. Many corporations also try to adjust their balance sheets favorably at the end of the year.
The interesting fact is that seasonality is not peculiar to the stock markets. Forex markets also tend to show seasonal effects. Seasonality is defined as a pattern that occurs at a particular time of the year.
The January Effect also affects forex markets due to the fact that many investors who are adjusting their stock positions try to convert their local currencies into dollars at that time.
However, dollar may show stronger January Effect with some currencies as compared to others. It has also been studied that dollar shows a summer seasonality when it tends to rise in USD/JPY and USD/CAD in the month of July and give back its gains in the month of 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 only shows that there are strong chances that during a particular time of the year, the chances of a particular currency pair going up or down are more.
Forex traders should keep these seasonal patterns at the back of their minds while trading during that period.
