What Is The Big Deal About August & Risk Tones?
August has some interesting season patterns for risk assets, this video will share what they are and how you can use them in your trading
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We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
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As we head into August we’ve had a couple of questions from subscribers in the terminal about a few recent comments and trade ideas regarding seasonal factors which affect certain currencies in the month of August, so we’ll just add some info on this for the question about these seasonal factors.
August, is for some traders a bit of a cautious month as historically it’s been a bad month for stocks, with August usually being the worst performing month for the S&P and Dow Jones going back all the way to 1987.
We also know that high beta currencies have a strong correlation to equity performance, especially the benchmark S&P, so if August is the worst performing month for Equity indexes like the S&P, then one would expect it to also be the worst performing month for things like the AUD and the NZD, and if we look at the seasonal performance in August we can see that August is indeed the worst month for the NZD and is usually also a drag on the Aussie Dollar as well.
Now these are the high betas, right? We expect them to follow equities, so if equities are doing bad then you would expect high betas to follow, and the opposite of that is of course the safe haven currencies like the JPY and the CHF.
So, if the seasonal pattern plays out, one would expect the safe haven currencies like the JPY and CHF to perform well, which means pairing high-betas against the safe havens in pairs like the AUDJPY and NZDJPY is a good way to take advantage of that pattern.
Now, the big question of course is whether these patterns will continue. Even though they have been very accurate and have a very high hit rate, they don’t always work out that way. There are market or seasonal related factors that could offer some insight into why it always happens in August.
It might be down to liquidity and volume. Remember that July and mostly August is considered the summer time of the western hemisphere, which means people go on holiday, which includes traders and banks and hedge funds and institutional investors etc, and when so many people are away it means there is less liquidity, or there are less buyers and seller.
Remember that liquidity and an instrument’s volatility goes hand in hand, one of the reasons why volatility spikes when we have uncertainty in the market is partly due to the expectation of price fluctuations, but it’s also due to a lack of liquidity, as people get out of the game and move to the side lines it can create liquidity are pockets that if triggered can see exacerbated moves, which is why summer time can (due to the lower liquidity) often create big exacerbated moves.
And if you look at it from a behavioural point of view, traders are always more sensitive to downside than upside, markets don’t panic when prices go up, they panic when price go down, so if you combine thinner liquidity with potentially exacerbated price moves then that does explain the possibility of lower prices in August.
There is also the behavioural herd mentality to consider, if everybody thinks August will see stock prices fall then that can create an atmosphere where more traders stay on the side lines which sees even less liquidity and could see even bigger moves, so it can be self-fulfilling in that sense.
Now, having said that, the question then is will it happen again this time round. Well, there is really no way of knowing.
There are certainly enough negative catalysts in play right now to give the markets a reason to sell off, but whether it will happen no one knows, and if there is an analyst out there that tells you it will definitely happen again without a doubt then they aren’t being honest because things can change.
Also keep in mind, there is often a joke that analysts and traders make when people say “THIS TIME THINGS ARE DIFFERENT”. And even though that is very cliché I do think this time is different, that doesn’t mean I’m saying the seasonal pattern won’t play out, as I said it’s impossible to know, what I mean though is with everything going on after covid with all the uncertainty, I think if there ever was a year where the seasonal pattern might not play out this would be the year, if that makes sense.
So, just be careful with these patterns, patterns are useful because as humans we rely on patterns and familiarity in everything we do every day, so when we see patterns like this we often get too excited than we should when it comes to trading.
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If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
As we head into August we’ve had a couple of questions from subscribers in the terminal about a few recent comments and trade ideas regarding seasonal factors which affect certain currencies in the month of August, so we’ll just add some info on this for the question about these seasonal factors.
August, is for some traders a bit of a cautious month as historically it’s been a bad month for stocks, with August usually being the worst performing month for the S&P and Dow Jones going back all the way to 1987.
We also know that high beta currencies have a strong correlation to equity performance, especially the benchmark S&P, so if August is the worst performing month for Equity indexes like the S&P, then one would expect it to also be the worst performing month for things like the AUD and the NZD, and if we look at the seasonal performance in August we can see that August is indeed the worst month for the NZD and is usually also a drag on the Aussie Dollar as well.
Now these are the high betas, right? We expect them to follow equities, so if equities are doing bad then you would expect high betas to follow, and the opposite of that is of course the safe haven currencies like the JPY and the CHF.
So, if the seasonal pattern plays out, one would expect the safe haven currencies like the JPY and CHF to perform well, which means pairing high-betas against the safe havens in pairs like the AUDJPY and NZDJPY is a good way to take advantage of that pattern.
Now, the big question of course is whether these patterns will continue. Even though they have been very accurate and have a very high hit rate, they don’t always work out that way. There are market or seasonal related factors that could offer some insight into why it always happens in August.
It might be down to liquidity and volume. Remember that July and mostly August is considered the summer time of the western hemisphere, which means people go on holiday, which includes traders and banks and hedge funds and institutional investors etc, and when so many people are away it means there is less liquidity, or there are less buyers and seller.
Remember that liquidity and an instrument’s volatility goes hand in hand, one of the reasons why volatility spikes when we have uncertainty in the market is partly due to the expectation of price fluctuations, but it’s also due to a lack of liquidity, as people get out of the game and move to the side lines it can create liquidity are pockets that if triggered can see exacerbated moves, which is why summer time can (due to the lower liquidity) often create big exacerbated moves.
And if you look at it from a behavioural point of view, traders are always more sensitive to downside than upside, markets don’t panic when prices go up, they panic when price go down, so if you combine thinner liquidity with potentially exacerbated price moves then that does explain the possibility of lower prices in August.
There is also the behavioural herd mentality to consider, if everybody thinks August will see stock prices fall then that can create an atmosphere where more traders stay on the side lines which sees even less liquidity and could see even bigger moves, so it can be self-fulfilling in that sense.
Now, having said that, the question then is will it happen again this time round. Well, there is really no way of knowing.
There are certainly enough negative catalysts in play right now to give the markets a reason to sell off, but whether it will happen no one knows, and if there is an analyst out there that tells you it will definitely happen again without a doubt then they aren’t being honest because things can change.
Also keep in mind, there is often a joke that analysts and traders make when people say “THIS TIME THINGS ARE DIFFERENT”. And even though that is very cliché I do think this time is different, that doesn’t mean I’m saying the seasonal pattern won’t play out, as I said it’s impossible to know, what I mean though is with everything going on after covid with all the uncertainty, I think if there ever was a year where the seasonal pattern might not play out this would be the year, if that makes sense.
So, just be careful with these patterns, patterns are useful because as humans we rely on patterns and familiarity in everything we do every day, so when we see patterns like this we often get too excited than we should when it comes to trading.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
