Forex market corrections aren’t random events; they often correlate with specific times of the day, week, month, or quarter. Recognizing these patterns can significantly improve your trading strategy.
Intraday Corrections: Session Starts and Ends
The beginning of trading sessions, particularly the European/London session, often see sharp price movements. Interestingly, these strong moves frequently reverse towards the end of the same sessions. This is largely due to larger traders closing positions to secure profits or cut losses before stepping away from their desks. The same pattern, albeit less pronounced, occurs at the end of the US session. These actions demonstrate a desire to minimize risk exposure overnight.
Weekly Corrections: Friday’s Impact
The effect is particularly pronounced at the end of the London session on Fridays. The risk of news breaking over the weekend prompts many traders to reduce their exposure, reluctant to bet on a trend that could be impacted by weekend events. This increased risk also often fuels a spike in rumors and speculation.
Monthly and Quarterly Corrections: Fund Rebalancing
Corrections can also occur towards the end of a month, and even more noticeably at the end of a quarter, sometimes lasting for several days. This is driven by large institutional investors, like funds, who move more slowly but exert considerable market influence.
These corrections stem not only from a desire to limit exposure but also from the need to rebalance portfolios. Many funds are obligated to maintain specific allocations of currencies and assets.
Rebalancing and Market Momentum
At the end of the quarter, funds must issue reports reflecting their current holdings. If the market has seen significant one-directional movement during the quarter, they will need to rebalance to meet their commitments. This involves selling off assets that have become over-weighted and buying assets that have become under-weighted.
It’s important to note that these corrections don’t usually indicate a change in the overall market trend, but rather they represent a temporary, time-based adjustment. Being aware of these patterns can help traders avoid unexpected losses and potentially identify profitable trading opportunities.
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