Summer Forex Market – Don’t Be Complacent

It is easy to keep a low profile during summer forex trading due to thin liquidity. However, thin liquidity does not preclude volatility and/or trends from developing. Even range markets offer opportunities. This suggests staying alert to the price action as history shows that there summer markets will offer chances to trade.

So how does a forex trader go about trading during summer markets? There is no fixed rule as history has shown the currency market can move and trends develop when it is least expected. One characteristic is that US afternoon sessions tend to be much quieter than usual. Forex trading activity, in general, peaks during the European-North American session and then tails off during the U.S. afternoon session. This is the normal pattern but the U.S. summer session is even thinner than usual. In addition, Friday sessions tend to be thinnest, especially after Europe goes home and traders look for early exits from the market. This can also be seen in the Global-View.com forex forum, which we find to be an excellent microcosm of forex market behavior.

Last summer was an unusual one as it setup the start of the crisis that sent global financial markets reeling and on the brink of collapse. For example, the EUR/USD traded a range of 1469 pips, 1.6040 (record high) set July 15, 2008 to a low at 1.4571 on August 26. The net change for the dollar for July-August was +7.5%. GBP/USD traded a high of 2.0157 on July 15 to a 1.8171 low on August 29. This was a 1986 pips range and +9.6% for the dollar vs. GBP. USD/JPY traded a more subdued range as JPY firmed on its various crosses. USD/JPY traded a high of 110.51 and a low at 103.77, which was a 674 pip range. The net change in the dollar for the summer months was +3.3%.

By contrast, the summer of 2007 showed tighter ranges and smaller net changes. EUR/USD traded a 493 pip range and the net dollar change was -0.8%. The GBP/USD range was 707 pips and the net change in the dollar was just 0.4%. USD/JPY traded a wider 1297 pip range and its net change was -6.0%. While the more modest ranges in EUR/USD and GBP/USD might be more typical of summer markets, there was enough movement (e.g. USD/JPY and JPY crosses) to provided opportunities to trade.

The point of this analysis is to show that thin liquidity does not mean the market will not move or trends will not develop. While the summer of 2008 may not have been a typical market, it illustrated the danger of being complacent and that trends can develop despite thinner than usual summer liquidity. The summer of 2008 setup the gyrations in global financial markets in the months that followed and history will likely show these were once in a lifetime moves. Looking at the summer of 2007 shows there were tighter ranges in the eur/usd but a wide range for USD/JPY. So, don’t take anything for granted and treat the summer period as any other market while being alert to the times when the market is liquid and times when there may be pockets of illiquidity.