The January Forex Effect
Peter Brandt | Jan 09, 2013 04:13PM ET
I have covered the January Forex Effect several times over the years. This phenomenon can be such a powerful trading edge that it demands emphasis whenever possible.
Track Record
The January Forex Effect is the historical tendency of the U.S. Dollar to establish at least a half-year high or low during the month of January -- a high or low that often becomes the absolute annual high or low. In fact,the EUR/USD has made a significant high or low in 29 of the past 40 years (dating back to the commencement of forex futures trading at the IMM).
From a trading perspective, this is a vitally important phenomenon because it can define risk.
Pure Analysis
The January Effect has everything to do with technical analysis. Roy Longstreet was a technical analyst and trader in the early days of commodity trading. He refined a quasi-technical approach called the Analog Year Concept. This approach attempts to find seasonal repetition in price behavior. The January Forex Effect analysis, herein, focuses entirely on past price behavior as an indicator of price expectation. This, in essence, is technical analysis in a very pure form.
The monthly chart below shows the EUR/USD dating back to 1993, a period of 20 years. As noted by the red (highs) and green (lows) arrows, the January effect has worked in this forex cross in 17 of the past 20 years. The same pattern can also be found in the U.S. Dollar Index, USD/JPY and USD/CHF(not shown).
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