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Seasonality – Dollar Index Seasonal Trends (DX)

Discussion in 'Forex Discussions' started by painofhell, Aug 16, 2015.

  1. painofhell

    painofhell Content Contributor

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    Seasonality, for trading purposes, is the tendency of a tradable to rally or decline at certain times of the year. Knowing the high probability seasonal trends can provide a context for other forms of analysis, and can also aid in entering and exiting positions at likely turning points.

    So how do we find Dollar Index seasonal trend(s)?
    And what are the commonly occurring Dollar Index seasonal trends?
    There are seasonal patterns within the Dollar Index, and those will be disclosed shortly. First, let’s look at what seasonal trends are and how we find them.

    Finding Seasonal Trends

    By default most charts are set up to show the price history of a currency, stock or futures contract in chronological order–one day follows another and 2012 follows 2011 which follows 2010 and so on. The charts shows the price moving through time, from the past to the current. This is not the only way to look at a chart though, in fact there are many ways, and seasonal charts are one of those other ways.

    Instead of looking at the last 30 years of Dollar Index price 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, 15, 20 and 30 year averages).

    Will the average show Dollar Index seasonal trends where it generally turns higher in certain months, or turns lower in others?


    Dollar Index Seasonal Trends – 5,10,15 Year

    The first time frames looked at are the 5,10 and 15 year seasonal trends. Why look at all three and not just one average? As you will see each average is slightly (or significantly) different. Therefore, we are only looking for common points where all three time frames bottom or top at similar times of the year. By looking at multiple time frames, and finding commonalities, we can extract the strongest Dollar Index seasonal trends.
    [​IMG]


    5/10/15 Year DX Seasonality Study
    Source: Signal Financial Group
    Over the three time frames studied we can extract the commonalities to find usual tendencies in the USD over the last 5, 10 and 15 years:

    Start of the year to mid-February has an upward bias.
    Typically tops out in the middle of February and declines into mid-March.
    Last half of March is usually strong and then sells off into late April.
    Beginning to middle of May is a strong time for the USD, but then falls into a short-term low by the end of May.
    End of May to Mid-June may see some price appreciation.
    Middle of June usually marks a short-term high and the USD declines into the end of July.
    Rally from beginning of August to early September.
    Early November to late-November sees a rise.
    Late December is a bearish time.
    Dollar Index Seasonal Trends – 20 and 30 Year
    The 5, 10 and 15 Dollar Index seasonal trends data above is useful, but by looking at a longer term time-frame we can erase some of the noise which is seen on the shorter time-frames above. Here we will look at the Dollar Index seasonal trends which occur on the 20 and 30 year time-frames.
    USD Seasonal Chart – 20 and 30 Year


    20/30 Year DX Seasonality Study
    [​IMG]

    January to late-February is generally a bullish time.
    Early March to mid-March is bearish.
    There is normally a short rally from mid-March to late-March.
    Late March to early May is bearish time.
    Mid-June is often a high point followed by a decline into the end of July.
    Early August to mid-August usually sees a bit of a rise.
    Mid-August and mid-September mark short-term highs followed by declines into the end of September.
    Mid-November to late November can be a bullish time.
    December is a bearish month.
    Dollar Index Seasonal Trends – Dominant Trends

    In our final step we will we will extract the common patterns from all time frames to provide the most reliable seasonal patterns…which have been present in the 5, 10, 15, 20 and 30 year seasonal trends.

    Start of the year to mid-February is usually bullish.
    Early March to mid-March is bearish.
    Last half of March sees prices rise.
    Late March to late April is a bearish time.
    Middle of June usually marks a short-term high and the USD declines into the end of July.
    Early August to mid-August is a bullish time.
    Mid-November to late November often sees a rise.
    Late December is a bearish time.

    Seasonal Trends – Final Notes

    Seasonality is an average, not a rule. In any given year price can deviate from the seasonal tendency and traders shouldn’t fight it.

    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 that time.

    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.
     
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