Forex in summer: peculiarities of summer trading | Litefinance (2024)

Summer is considered to be the hardest trading period with the exception of Christmas holidays. At this time, institutional investors leave the market to go on vacation, which is why liquidity is down, volatility is up (or down due to the lower trading volumes?). Price behavior is less predictable. However, this is how it works in theory, and reality is often different. Does the volatility and liquidity of markets really change in summer? Do asset quotes depend on the seasonal factor? Are there cyclical seasonal patterns in the instruments of different markets? You will find answers to these and other questions in this review.

Peculiarities of summer trading on the stock and OTC markets. Debunking the myths

Summer is time for vacations, sea, and sunbathing – anything but work. In the summer, people want to travel, enjoy different types of leisure activities, forget about work and emotionally exhausting trading, and spend time with family and friends at least for a little while.

Does seasonal factor affect the assets? Traditionally, trading in summer is considered to be completely different from other periods and has a pronounced seasonal nature:

• Lower trading volumes and impact of institutional capital. Large market makers also want to rest: banks and investment funds let their employees go on holidays, private traders with large capital also prefer to go on vacation.
• Increased volatility. This follows from the previous statement: a decrease in volumes means a decrease in liquidity. A buyer wants to buy an asset, but there are no sellers and vice versa.
• Lower impact of fundamental factors. The publication of quarterly reports of companies has a local impact, which is not comparable with annual reporting and development plans for the next financial and calendar year. Industry demand does not put pressure on commodity markets (mainly oil and gas, whose consumption is reduced in summer and thus does not put pressure on the price).

It seems to me that these statements are at least partially true. If you owned large capital and understood that small traders are reducing volumes in the summer, would you not be tempted to push the quotes in the right direction? Moreover, a vacation does not cancel the possibilities of algorithmic trading (with the help of advisors). If we talk about fundamental analysis, its factors not depend on the season. For example, oil, which in spring, autumn and winter is heavily dependent on OPEC policy and the heating season, was under pressure from geopolitical factors this summer due to the trade wars between the USA and China, sanctions against Iran, etc.

Is there a difference between trading in summer and other seasons? I will try to express my own opinion, which is different from most theories, and back it up with some statistics.

This analysis may be of interest to traders who prefer medium- and long-term strategies, keeping positions in the market from several weeks to several months. Scalpers can easily earn on minute trades at any time of the year.

Summer: should you radically change your approach to trading based on the seasonal factor?

Most onlineresources describe summer as the most unpredictable trading period, comparing it only with the New Year holidays. At this time, small speculators and some large traders whose plans are unknown are the only ones that remain on the market. Hence the constant unpredictable breakouts of resistance and support levels, prolonged drawdowns, etc. This is a very controversial issue, especially if we analyze individual instruments on different markets. I suggest that we start with the most interesting instrument in terms of analysis – crypto currencies.

1. Crypto currencies

Is summer a period of higher volatility and lower trading volumes? This definitely does not concern crypto currencies. According to Google Trend, the number of Bitcoin requests began to grow sharply since the beginning of June and has already reached the February 2018 level. It may be far from the peaks of December 2017, this is still a clear example of the growth of investor interest in the summer.

After a relative flat in 2018, the cryptocurrency market sort of warmed up: capitalization increased almost 2.5 times from April to July 2019. Moreover, the growth dynamics in the three spring months amounted to 101.35% (from 134.34 to 262.44 billion US dollars) or an average of 33.5% per month. During June, the market capitalization rose to 387.12 billion, which is about 45%. Although was followed by a fairly strong correction, such a significant growth in volumes demonstrates the activity of large investors who were able to shake up the market and give it an optimistic upward push.

This chart shows the change in capitalization over the last year. It shows that price bursts in either direction appeared mostly in the summer and to a lesser extent in the autumn. A noticeable decline in capitalization occurred in winter, but this does not change the fact: trading on the crypto currency market is active both in winter and in summer. The falling trend occured closer to the end of the year, but the example of December 2017 shows the main factor is not season but rather investor interest, i.e. fundamental factors and speculative capital. Unlike stock or commodity markets, the fundamental factor here can give the market a boost at any time, since it is not connected to the annual accounts of companies or the growth in demand for an asset during the heating season.

Volatility is another matter – it really does have an effect on crypto currencies in the summer. We can recall June and July 2019, where some days it amounted to 10-25%. But where does it come from?

Theory suggests that the cause of volatility is the lack of traders willing to buy / sell an asset in the market, since traders are on vacation. With crypto currencies it is different: the collapse of the market in July 2019 is explained quite simply: big business gave the market a push, BTC (and other altcoins with it) passed the psychological mark of 10 thousand dollars and rushed up. However, investors remember what their blind belief in endless growth brought them. So they gave BTC the opportunity to slightly move up to cover the margin (+profit) and closed long positions, thus having triggered a rollback to a strong psychological support level.

Let us compare the price behavior, as well as the highs and lows for each season as a percentage relative to each month.

This table shows:

• Capitalization at the beginning and end of each season (according to CoinMarketCap).
• Change in the level of capitalization at the end of the period compared to its beginning.
• High and low prices for the analyzed period.
• Deviation of the highs and lows from the values ​​at the beginning of the month as a percentage.

The figures are approximate (a small error margin is acceptable since I was to going for an ideal comparison, I just needed to show the comparative seasonal dynamics of quotes). The data is for the last 6 seasons and June 2019. This period can be extended if necessary.

The first thing that strikes the eye is that summer is not the turning point for investors. The turning point came after the peak growth phase in the winter of 2017-2018. Capitalization fell relatively evenly every season - within 30-40% of its value at the beginning of the analyzed period. We also see comparatively similar percent deviations of the highs and lows. Moreover, no anomalies were observed in the summer period in comparison with other seasons.

Starting from 2019 things are different: the trend stops falling and goes into flat (the flat is clearly visible when analyzing the period from January 1, 2019 to April 30, 2019), then growth begins. We can clearly see how the values ​​of the deviations from highs and lows change places - this suggests that now, at the end of the season, the price closes closer to its seasonal extremes.

We can draw the following conclusions From this analysis:

1. Trading on the crypto currency market has a pronounced cyclical nature. InteTraders are most active in the first months of the year. During this period, there is an increase in volatility. By the end of the year, activity decreases. Summer is as active as any other period for crypto currencies.

2. Seasonal analysis allows us to see relative patterns of growth or decline, based on which we can assumed that:

• It is unlikely that by the end of the year the growing dynamics will turn into negative.
• We should not expect a sharp increase, average growth for 3 months will be 30-40%, provided positive news.
• Intraseasonal rollbacks are a normal occurrence that traders just need to wait out.

3. In winter, both a sharp price surge and a flat are possible. It all depends on large investors and news.

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

2. Commodity markets

Commodity assets are unique because in addition to geopolitics and speculative factors, their prices are greatly influenced by direct demand from industry. It primarily concerns oil, gas, metals (gold, silver, platinum, copper, aluminum, etc.), and food (wheat, beef, etc.). And to some extent, seasonal factor can play a role. Let us turn to statistics again.

2.1. Oil (Brent)

Question: what is volatility? Theory says that this is a range of price fluctuations over a period of time. Therefore, to compare volatility in a given season, as with crypto currencies, we should analyze a long-term period without taking intramonthly fluctuations into account local. The price fluctuate in the range of 60-63 dollars a dozen times in both directions, we still consider this a flat, and these fluctuations are only of any interest to scalpers.

What we can observe in the chart:

• Strong price movements are observed mainly in the fall: at the end of 2016, from October to December 2018 and in June 2019 there was a decline (areas highlighted in yellow). The decline of June 2019, though not so strong compared with other periods, is an example of the fact that oil is volatile in summer.
• From March 2016 to October 2017, we can see a flat (highlighted with a blue square). Despite strong internal fluctuations, it is still a flat in comparison with the subsequent growth in this time interval.
• A growing trend was observed from October 2017 to October 2018.

Conclusion: in spite of the fact that in summer the oil reserves usually grow due to reduced demand, the price does not tend to decline, and there is no reason to speak of high volatility compared to other periods. Which factors influence the quotes? At the beginning of the year, the balance of production and consumption is more influential, but in the middle of the year, investors are more responsive to geopolitical factors. However, the pattern is not consistent. But one can definitely say that seasonal factor does not play the most important role in the dynamics of the quotes.

The exception is the chart of quotations of natural gas. Unlike oil, it is not a strategic investment tool for investors. It's hard to explain why - it just happened this way. Also, gas has no correlation with oil. Therefore, the local demand and supply directly affect the price. If you look at the 5-year chart, you can see the pattern: in most cases, sharp trend movements began in November - February, whereas in the middle of the year the price either continued the long-term trend that started or (more often) entered horizontal flat.

2.2. Gold

I suggest we look at the quotes of gold last summer. For the entire three months, the price confidently went down, continuing the trend that started in mid-April.

The end of this downtrend came in August, but I would not associate it with the autumn growth of business activity. If you look at the summer behavior of prices in previous years, you can see there is no regularity in the summer period. But the annual cycles are evident.

In this screenshot, annual price peaks are clearly seen in December-January. In part, this can be explained by the fact that investors prefer to wait out the holidays in a safe haven asset. In other words, the seasonal pattern in the gold chart is visible, but this applies exclusively to the winter period. It may not be that pronounced compared to other trend movementsbut it still should be taken into account by careful traders.

Conclusion: the concept of seasonal factor is only applicable to gold when it comes to winter holidays.

2.3. Wheat futures

This instrument is fundamentally taken as an example to show that the seasonal factor still influences certain assets.

This chart for almost 10 years shows a clear pattern almost every year: pronounced peaks with a quick rollback to previous positions occur either in January-February (green arrows) or in July (red arrows). A similar pattern is observed in the pork futures chart - there are usually similar peaks in June. I will not go into the details of the reasons, just pay attention to the fact that you can earn on such cycles.

Conclusion: seasonal factor is very pronounced in food assets, which may be related to their production cycle. But such instruments are an exception, since seasonal factor does not have such a significant impact on other assets. You should also pay attention to the fact that these instruments have only peaks with a subsequent rollback, there are no seasonal lows.

3. Stock markets

In theory, seasonal factor affects stock markets as much as commodity markets. In the winter-spring period, there is a peak in the publication of financial statements and distribution of dividends, therefore trading on the stock exchanges is particularly lively. In the summer, no significant statistics are released, quarterly reporting has a local influence, most people take vacations. But this is only in theory.

This chart shows that regardless of season, the price went up steadily. There were fluctuations, but they happened in September, October, December, January, April, June with no discernible seasonal pattern. NASDAQ responded to fundamental factors, but not to the seasons.

It is possible that seasonal factor still affects stocks of individual companies. For example, we can talk about large agricultural corporations, but retailers or technology companies (some of them have been selectively reviewed) do not show seasonal patterns.

Conclusion: working with the shares of individual companies, one should take into account the specific features of their activity. If we are talking about indices, summer trade is not really different from trading in other periods (with the exception of the annual reporting and dividend distribution period).

4. Foreign exchange markets

Foreign exchange markets react to seasonal factor even less than commodity markets. If, in the case of commodity assets, there is at least a partial influence of the growth in consumption, currency trading in terms of the level of volatility is essentially the same at any time of the year. A minor exception is probably the Canadian dollar, which is affected by oil.

In terms of trade volumes and the rate of price change, in theory there is a “summer slowdown”. Due to the decline in trading volumes, the price changes more smoothly. However, different analysts give completely different reasons for this:

• In summer, volatility of currency pairs increases: the buyer making the price cannot find sellers for a long time, so the liquidity level of decreases. And vice versa.
• In summer, volatility decreases: trading is weak, as the number of traders decreases on the market.

Which of these arguments is closer to the truth is a rhetorical question. But you can definitely say that in summer the price behaves less predictably. According to S&P research, the worst month to trade is August. Analysts say that the strength and direction of the trend are set by institutional investors, who go on vacations in August. Small traders just rock the boat in different directions. Trade takes place in a relatively narrow price range and is accompanied by constant ups and downs within it.

In this chart, the EUR/USD pair shows both trend movements and a flat. If you look at the dates, in some periods the trend movement occurred in summer (the yellow segment), and there were no sharp price fluctuations, as in the subsequent period they happened. But the next 1.5 years long segment (the blue line) can be called a partial flat with constant price fluctuations. However, it is in this section that we can see the influence of seasonal factor: from October to December two sections show a pronounced downtrend. But in all fairness I should note that in 2017, the trend of the autumn of 2015 and 2016 did not repeat: a slight decline in October was followed by growth in November (the section is highlighted with a yellow circle). And the next price surge came in the spring. In 2018, the effect of seasonal factor was not visible from the chart.

Now let us look at the USD/CAD commodity pair, the situation here is even more interesting.

In 2016, the strong trend, which has been growing since October 2015, reversed and was confidently going down for the next 4 months. The next decline of this magnitude came in May-September 2017. Pay attention to the two long-term sections, which are indicated by a blue line. They are a long-term growing and fairly narrow corridor, followed by a sharp collapse. In accordance with this pattern, it can be assumed that this collapse already begun, judging by the sharp fall of the price. But, first, this pattern is visible only in the 5-year chart, and second, this is pure technical analysis. If you look at the dates of periods of smooth growth and sharp declines, we will again see no correlation with the summer period and seasonal factor.

Conclusion: the effect of seasonal factor on currency pairs seems highly exaggerated. Local price changes during holidays (national holidays, New Year) may indeed take place, but there is no clear pattern. We also see no pattern of volatility or flat in the summer period. So you can easily ignore the seasonal factor and rely on more serious fundamental factors.

In the end I would like to give traders some recommendations for summer trading:

• Do not give into concerns that summer is a special period compared to other seasons. The markets are cyclical and trading is different from season to season.
• Believe in yourself and stay alert. Force majeure is possible in any season, and in most cases the market is almost independent of the season. The only exception is the New Year holidays.
• Learn to assess the strength of fundamental factors in a given trading period. Remember that factors can differ in terms of their strength, but seasonal factor does not play a significant role in this.

However, in winter, traders should be more careful. As you can see from the review, often you can see some patterns in December and February. Learning to use them to your advantage is another matter. But while I have debunked some myths about the summer trading, winter holidays still have a strong influence on the quotes.

Conclusion

The market is dynamic, no matter what time of year. If the EUR/USD is active in the European session, in the Asian session you can work with the Japanese yen. The same applies to trading in different times of the year: trading volumes fall in the summer, but will a trader with a capital of a couple of thousand dollars notice this decline? I don't think so. Factors may apply to individual assets, but if we are talking about geopolitics, seasonal factor does not matter.

Do you really want to make money? Then let go of the time, dates, seasons, try to look for patterns. Learn to feel the state of the market intuitively, be prepared for any development of events and Lady Luck will definitely smile at you! What do you think? Is there any difference between trading in the summer and other seasons? Join the discussion in the comments!

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Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.