calendar effect on your trading
Whether you are trading forex, commodities, or stocks, there is an economic calendar available that shows the scheduled news events or data releases related to the economy and different trading markets. Many professional investors and traders believe that trading market prices are subject to seasonal tendencies in most of the cases due to the fact that availability and demand for different assets are not constant during the year. To understand the issue better you probably know that the oil or natural gas trading prices often rise in the winter because the commodity’s demand as a heating fuel raises while during summertime when the demand for heat declines, prices would fall.
What is the calendar effect?
Calendar effect is also known as calendar anomaly refers to different trading market anomalies such as popular stock trading market behavior, or economic effect which is related to the calendar. Researches indicate that the days of the week, time of the months, time of the years, the time within the U.S. presidential cycle, and similar time events affect the price trends in different ways. Investors and traders who believe calendar effect exist see it as a chance to manage their trades timing in order to take advantage of calendar effects and changes in price trends.
Notable calendar effects
Below is a list of the most important calendar effects that traders would better consider before making decisions in different markets.
Sell in May
Stock market growth during the period from November to April is significantly stronger on average in comparison to the other months of the year. Researches and data show that stock market returns are lower during the May to October period.
The January effect would provide a chance for investors and traders to buy stocks for lower prices before January. Then they can sell them after the stock value increases and make profits out of it. No one is entirely sure why the stock market goes up in the early part of January.
United States presidential election cycle
Researches have shown that the stock market condition in the year following the election of a new U.S. president would experience weakness. Many advanced trading experts believe that the presidential election has a predictable impact on America’s economic policies which is followed by market sentiment due to the specific policies of the President.
Mark Twain effect
This calendar effect relies on the phenomenon that stock returns in October are lower than in other months of the year.
Many investors make a long-term decision based on the assumption that stock market performance in January predicts the performance for the rest of the year. By the mean in case the stock market rises in January, the trend is likely to continue until December.
Weekend Effect (Monday effect)
The markets do more poorly on Monday than on the other days of the week. Stock prices tend to decrease on Mondays based on weekend effect. By the mean, stock market closing prices on Monday are assumed to be lower than stock market closing prices on the previous Friday. There is no specific explanation of how returns on Mondays are lower than every other day of the week in trading markets.
Reduce your risk with calendar effect
It is crucial for any investor or trader to check the economic calendar before start trading. The times of the major data releases and events can influence market conditions considerably. Traders need to study any factor that can offer risks or opportunities in any single trade. The risk on each trade that is measured with different methods depending on the trader’s decision should be less than 2% of account equity. In cases of high-impact news is released, things can drastically change in any trading market. You face a high chance of managing your risk in trades by understanding the calendar effect comprehensively. It is true that traders are not able to anticipate exactly what data will be revealed, or exactly how many orders will come into the market due to its release but they can take actions to avoid unpredictable consequences that cause them losses. For example, professional day traders often close out their forex, stock, or futures positions before the high-impact data’s release according to economic calendar. They avoid taking new trades as well. Understanding the calendar effect allows traders to identify the moments of increased risk and plan to avoid it as an accurate decision.
Traders who day trade options often opt to hold positions through a major data release or calendar event. However, there are many options strategies designed for trading during specific events.
Why does calendar effect happen?
Although the calendar effect is proved to most of the traders and investors in different markets still there is no valid explanation on how it happens. No statistically significant evidence for calendar effects in the trading market is registered by this time.
Many critics believe that calendar effect and other similar patterns are the results of data dredging. Base on the assumption of efficient-market the calendar effect should not exist. Critics believe that the existence of the calendar effect should be already incorporated in the prices of securities.
The calendar effect is influenced by the financial trend. On the other hand, the investors’ sentiments and behavioral change impact the market’s performance and cause the calendar effect. Many believe that calendar effects do exist but their impact usually fades along with other factors.
Many trading anomalies in different markets all around the world follow time periods. Since many economic and business trends follow the calendar then calendar effect is not unexpected. Many trading experts are still investigating to detect the statistically significant dependencies of stock trading return, to the calendar and understand how particular days of the month or weeks can be considered for creating profitable investment strategies. Calendar effect is an abnormal return that can affect investor and traders’ strategies, portfolio selection, and risk and profit management. So any trader and investor need to study and consider calendar effect before making any trading decision in order to manage risks involved with the calendar and increase profits.