Anyone who has been trading for a while will have heard the old saying that goes “Sell in May and go away”. This saying primarily applies to equities, and means that they usually go through a long sell-off period between May and October, before recovering to their original levels.
Does this saying hold true for trading other than in equities? Well, it appears that the theory could have an impact on foreign currency too, but not quite as directly as it does for equities. If you understand which shares tend to decline the most during the summer trading period then you can use this knowledge to predict currency movements. You can also use an understanding of risk-aversion and human nature to get a broad picture of how the markets will move.
The summer market tail-off is something that is documented even in the mainstream media, and its effects on the world of stocks and shares are well understood. Most traders now expect a slowdown in the movement of stocks and shares over the summer, and know that this will turn into a recovery later in the year. The translation between equity markets and foreign currency markets is something that economists understand well, but many individual foreign currency exchange traders have not taken the time to investigate.
Intermarket analysis shows that the price actions taking place in the equity markets can have an impact on the foreign currency markets too. For example, a sell-off in stocks that takes place when many traders close their long positions (as they would do in May) could lead to a risk-off movement in the foreign currency market. So, during May it is reasonable to expect that popular safe-havens such as the US dollar, and lower-yielding currencies such as the Japanese Yen might see their values increase, while other currencies that are regarded as riskier may fall in popularity until the equities markets start to recover.
The Big Picture
So, next time you’re trading on http://www.iforex.com or another trading platform, don’t limit your analysis to looking at short term trends. Consider the time of year and the movements that are taking place in other markets. Expand the time period you look at when you are conducting technical analysis, and try to pay more attention to equities if they are not already a major part of your fundamentals.
The concept of intermarket analysis is an important one, and once you understand it you will be able to take advantage of it for a lot of your trading. It may seem like a lot of work to have to follow multiple markets, but the most successful traders are the ones that arm themselves with as many different points of view of the markets as possible, and learn how to interpret the big picture. It is easier to take advantage of the “sell in May” phenomenon if you hold long positions, but the principles of intermarket analysis can be applied to all of your trading.