Corrections don’t always happen out of the blue. Sometimes it is related to different times in the day, week, month or quarter. Being aware of these corrections can help you trade.
The beginnings of trading sessions tend to see sharper moves. This is best seen in the beginning of the European / London session. In many cases, these sharp moves occur also towards the end of these sessions and in the opposite direction of the day’s trade. Why?
Some big traders are closing their trades for the session, and cashing in a profit. Others are cutting their losses. In any case, they don’t want to be exposed after they leave their desks. This is also seen at the end of the US session, but in a smaller scale.
The effect is stronger towards the end of Friday’s London session. As news often breaks during the weekends, many don’t want to stay exposed – they don’t want to bet on the trend two days later. This is also a time when rumors tend to fly at a rapid rate.
Corrections at the end of the month / quarter
The phenomenon seen at the end of the month and especially at the end of the quarter can sometimes take a few days. Here, it isn’t only the big traders, but also the big funds, which move slowly but have a huge impact.
The motivation isn’t only to avoid unwanted exposure, but also the need to rebalance their portfolios. Some are committed to holding a strict portion of dollars, euros, pounds, etc. Other are committed to certain exposure to stocks of various countries.
At the end of the quarter, they need to produce a report that reflects their current holdings, and it needs to meet the commitments. So, if the quarter saw interesting moves but no big net change, the rebalancing is insignificant.
But when the markets go in the same direction during the quarter, there will likely be some correction towards the end. Why? The funds have higher than desired proportion of some asset class and smaller than desired proportion of another.
Corrections usually doesn’t reflect a change of trend, but only a seasonal correction.
In case of Q3 2011, stock markets crashed and the dollar strengthened during this period. So towards the end of the quarter, some funds need to replenish their stock of stocks and their stock of currencies different than the dollar.
This phenomenon can repeat itself if there is a clear bias during the next quarters.
Further reading: 5 Most Predictable Currency Pairs – Q4 2011
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