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Saturday, November 27, 2021

GBP/USD Seasonal Patterns – Use a Seasonality Strategy to Confirm Entry and Exit Points in Forex

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Normally we look at forex charts in chronological order, day after day, week after week and year after year. The typical chart chronicles the price path of a currency (pair) over the years and can provide a lot of information for technicians to use. Yet there is another way to view currency charts, and that is to look at them in a seasonal fashion.

So what are forex seasonality patterns, or forex seasonal charts? For our purposes, seasonality is the tendency of a currency to bottom or top at certain points in the year.

Instead of looking at the last 30 years of currency data in chronological order, what if you took each year (January to December) and could put each year on top of each other. All 30 years are then averaged and set to an initial value of 100 to provide one line which shows how the currency acts on average between January and December, over the last 30 years (below we will look at the 5, 10 and 15 year averages). Will the average show a GBP/USD seasonal pattern where it generally turns higher in certain months, or turns lower in others?

Below look at Pound futures, but note that since the Pound futures are traded relative to US dollars, we can use patterns seen in the futures market to trade GBP/USD seasonality patterns. Therefore, this information can be used in both the futures and forex market.

GBP/USD Seasonal Patterns – 5, 10 and 15 Year Seasonality

There are indeed consistent GBP/USD seasonality patterns, and we can see these patterns by looking at a seasonal chart of Pound futures. These seasonal tendencies can be used find opportune times to trade the GBP/USD forex pair (or Pound futures).

The seasonal chart shows the tendencies of the Pound over the last 5 years, 10 years and 15 years. Each average provides a different line, and this is important to understand about seasonality–it is an average, not a rule. In any given year price can deviate from the seasonal tendency and traders shouldn’t fight it. Yet we can find commonalities which occur in all three averages:

  • The Pound typically forms a bottom in early to late March and then moves higher into the end of April.
  • Early May to mid-May is usually a bearish time.
  • A bottom typically forms again in mid-May we see a move higher into early August.
  • Price usually peak early in August and decline into early September.
  • After October our averages diverge with the short-term (5 year) not providing the same information as the longer-term seasonality averages (10 and 15 year) thus making the seasonal tendencies less concise and less reliable during this time.
  • Averages re-align to form a top in early November and the price slides into mid-to-late November. After this the averages diverge again.

Seasonality is not a tool to use on its own, but rather should be combined with price pattern analysis to determine entry and exit points. Yet seasonality does provide us with windows of time where we can watch for trend reversals and feel more confident if we see a price pattern that indicates a reversal during the seasonal windows provides above.

It is important to keep the overall trend of the market in mind. In up trends use seasonal low points to buy. In overall down trends, use seasonal high points to get short or to sell.

Source by Cory A. Mitchell

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