Corrections don’t always happen out of the blue. Sometimes it is related to different times in the day, week, month or quarter. Being aware of these corrections can help you trade.
The beginnings of trading sessions tend to see sharper moves. This is best seen in the beginning of the European / London session. In many cases, these sharp moves occur also towards the end of these sessions and in the opposite direction of the day’s trade. Why?
Some big traders are closing their trades for the session, and cashing in a profit. Others are cutting their losses. In any case, they don’t want to be exposed after they leave their desks. This is also seen at the end of the US session, but in a smaller scale.
The effect is stronger towards the end of Friday’s London session. As news often breaks during the weekends, many don’t want to stay exposed – they don’t want to bet on the trend two days later. This is also a time when rumors tend to fly at a rapid rate.
The motivation isn’t only to avoid unwanted exposure, but also the need to rebalance their portfolios. Some are committed to holding a strict portion of dollars, euros, pounds, etc. Other are committed to certain exposure to stocks of various countries.
At the end of the quarter, they need to produce a report that reflects their current holdings, and it needs to meet the commitments. So, if the quarter saw interesting moves but no big net change, the rebalancing is insignificant.
But when the markets go in the same direction during the quarter, there will likely be some correction towards the end. Why? The funds have higher than desired proportion of some asset class and smaller than desired proportion of another.
This usually doesn’t reflect a change of trend, but only a seasonal correction.
In case of Q3 2011, stock markets crashed and the dollar strengthened during this period. So towards the end of the quarter, some funds need to replenish their stock of stocks and their stock of currencies different than the dollar.
This phenomenon can repeat itself if there is a clear bias during the next quarters.
The beginnings of trading sessions tend to see sharper moves. This is best seen in the beginning of the European / London session. In many cases, these sharp moves occur also towards the end of these sessions and in the opposite direction of the day’s trade. Why?
Some big traders are closing their trades for the session, and cashing in a profit. Others are cutting their losses. In any case, they don’t want to be exposed after they leave their desks. This is also seen at the end of the US session, but in a smaller scale.
The effect is stronger towards the end of Friday’s London session. As news often breaks during the weekends, many don’t want to stay exposed – they don’t want to bet on the trend two days later. This is also a time when rumors tend to fly at a rapid rate.
End of month / quarter
The phenomenon seen at the end of the month and especially at the end of the quarter can sometimes take a few days. Here, it isn’t only the big traders, but also the big funds, which move slowly but have a huge impact.The motivation isn’t only to avoid unwanted exposure, but also the need to rebalance their portfolios. Some are committed to holding a strict portion of dollars, euros, pounds, etc. Other are committed to certain exposure to stocks of various countries.
At the end of the quarter, they need to produce a report that reflects their current holdings, and it needs to meet the commitments. So, if the quarter saw interesting moves but no big net change, the rebalancing is insignificant.
But when the markets go in the same direction during the quarter, there will likely be some correction towards the end. Why? The funds have higher than desired proportion of some asset class and smaller than desired proportion of another.
This usually doesn’t reflect a change of trend, but only a seasonal correction.
In case of Q3 2011, stock markets crashed and the dollar strengthened during this period. So towards the end of the quarter, some funds need to replenish their stock of stocks and their stock of currencies different than the dollar.
This phenomenon can repeat itself if there is a clear bias during the next quarters.
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
USD/JPY goes on a roller-coaster ride prompted by geopolitical risk
USD/JPY whipsaws lower and then higher on alternating risk-on risk-off caused by Middle East tensions. Governor Ueda talks about defending the Yen from further weakness and currency-induced imported inflation. USD/JPY price chart shows bearish Hanging Man forming, boding ill for future price action.
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.