What is Forex Seasonality?
Put simply, forex seasonality is the tendency for currencies to move in repeatable and relatively predictable patterns over the course of time. When discussing seasonality, most guides will mention certain monthly trends that occur over the calendar year. A pertinent example is the Japanese Yen’s tendency to appreciate at the end of the Japanese fiscal year. Yet these patterns are very difficult to trade as they are quite unpredictable and have little legitimate use for the short-term trader.
We will instead examine a tendency that is much more useful on a short-term basis: currencies’ behavior in setting highs and lows on an intra-week basis. The relative predictability is obviously what interest as forex traders; if something repeats, it is theoretically straightforward to speculate on such repetition.
Forex Trends and Intra-week Tendencies
Years of forex market data shows that currencies will most likely set their highs and lows for the week at the beginning and end of the trading week. Intuitively this makes sense: if a currency is in a fairly consistent uptrend, its low on Monday will likely hold through Friday and the opposite should also be true. Furthermore, major European and North American currencies will also tend to see larger price moves towards the end of the week.
Of course this is all very interesting, but the first question that immediately comes to mind should be obvious: how do we use this in our trading?
Using FXCM’s Strategy Trader software, we will code a strategy based on intra-week seasonality and apply it to a number of different currency pairs
View a video guide on strategy backtesting and optimization in Strategy Trader here:
http://www.blip.tv/file/4002341
Forex Seasonality Strategy Parameters
If we wish to speculate that Monday’s Highs or Lows will hold, we are likely speculating that the currency will continue in one direction through the subsequent week of trade. There are a number of ways to do this, but sometimes the simplest solution is best when it comes to trading strategies.
Entry Rule: On Tuesday, set a Buy Stop entry order at Monday’s high, a Sell Stop entry order at Monday’s low. We will maintain these Buy and Sell Stop entry orders throughout the week unless we have already gone long or short the pair, respectively.
Stop Loss: The opposite stop entry order will take us out of a given position and set a trade in the opposite direction. This will be the case unless there was already an order triggered in the other direction through the previous week of trade. In other words, if the strategy goes long at Monday’s high but subsequently flips direction at Monday’s low, there will be no stop order in place on the ensuing short position.
Take Profit: None
Exit Rule: Close as near to Friday’s closing price as possible.
Using Strategy Trader, this is relatively easy to accomplish in code. Thus we are left to load the strategy onto our chart and see the results.
Download and install the Strategy Trader platform, then import the following code example from the DailyFX forex forum. Download and unzip the attached .zip file. Open WeeklySeason.fxd and click “OK” when prompted on whether you would like to import the Strategy Advisor into your platform.
Subsequently open the WeeklySeason.fxw file to load the workspace that will load the strategy onto the British Pound/Japanese Yen currency pair.
Forex Seasonality Strategy Results
If we run this strategy on the often-volatile and fast-trending British Pound/Japanese Yen pair, the results are quite impressive.
Despite noteworthy periods of underperformance, the strategy hypothetically performed very well on the GBPJPY going back to the beginning of 2001. Though past performance is never a guarantee of future results, such simple and intuitive trading rules show promise on other currency pairs as well.
Applications for Every Day Trading
Now that we know of currencies’ tendency to make their highs and lows at the beginning and end of week, we can use this as a filter of sorts for our own trading techniques. If employing a trend-based trading system, a trader may want to see whether a currency has broken its early-week high or low and take a trade in that direction. If a trader employs a more range-based trading system, they may also watch for the currency’s ability to establish a single direction following a break of the early-week high or low.
Though nothing is perfect, this research shows that a trader likely has a better chance of success if trading with the general seasonal tendencies.
Applying it to Existing Forex Strategies
In subsequent articles we will continue to examine forex seasonality and potential applications as a guideline for other popular trading styles. In doing so, we hope to establish more concrete ways in which to take advantage of reasonably predictable patterns across forex markets.
If you would like to suggest ideas for this topic or any other forex strategy you would like to see in this series, feel free to e-mail author David Rodríguez at drodriguez@dailyfx.com.
View previous articles in this series:
Forex Trading Strategy Analysis: Trade with Market Conditions
How do we use Money Management for Moving Average Forex Strategies?
How do we set stops for the Range Trading Strategies?
Written by David Rodríguez, Quantitative Strategist for DailyFX.com
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