Seasonal patterns trading in forex
Trading foreign exchange markets (Forex) is one area where location plays no role, yet it helps traders to be aware of certain environmental factors that define the present state of their investments. Regarding economic data, various indicators are produced on a national level (e.g., consumer price index). However, if we focus our attention on trade between countries, we can acquire information on their foreign trade activities that provide us with new signals.
For example, Germany is the largest economy in Europe and if it reports an increase in exports of 6%, then traders expect the rates of its currency (Euro), also known as the Deutsche mark (DEM) to appreciate against other currencies like USD or JPY. This has come to be known as the trade-weighted index (TWI) and it is one of the measures that describe the relative strength or weakness of a currency.
Mutual trading opportunities
One can also look at mutual trade between nations for finding out opportunities in investments. If we consider Mexico, its major trading partners are the United States, Canada, and Brazil. If the Mexican Peso depreciates against the U.S dollar, there is a possibility of investing in pesos to take advantage of its strengthening again. Another country that provides traders with interesting opportunities in Great Britain since it trades heavily with European countries like Germany and Italy. The above information can be exploited by traders who are aware of technical indicators.
Another interesting piece of information is a country's trade balance, which shows the difference between imports and exports of a particular nation over a period of time. If we take Germany as an example, it had a trade deficit in the year 2014 (-120 billion dollars). As seen from the chart below, this is also confirmed by two moving averages with a downward slope. These indicators are used by traders to forecast that the DEM will depreciate against the USD.
At times, looking at one indicator isn't enough for forecasting trader sentiments about a currency. At this juncture, it becomes necessary to combine various tools like support and resistance levels of candlesticks with other indicators like Stochastic Oscillator and Relative Strength Index (RSI). The following chart shows that the DEM depreciated against the USD, but found support at a certain point and then began to rally. This also corresponds with our observation of two moving averages converging towards each other.
The above discussion indicates that investors should pay attention to environmental factors like foreign trade activities, which influence the strength of currencies. They should also be cautious of conditions like trade deficit or lack of demand for a currency, which can lead to depreciation.