The month of August is vacation time for many people. This affects the forex market’s volume, which is lower, but it doesn’t necessarily impact the volatility. There’s one more summer week left. Afterwards the moves will be stronger.
Some currency pairs trade in narrow and expected ranges, while others go wild. Let’s see some examples, and see what we can do.
It’s summertime in the northern hemisphere. The French are know for their famous Vacance. Other Europeans also go for holidays ranging from two to five weeks. Also in North America, many people are on holiday, though the impact isn’t that strong.
This naturally affects forex trading. The volume of trade is lower. That’s easy to understand and to see. But does the volatility change as well?
On one hand, low volume means no big moves, since there isn’t too much going on. This could be seen in the GBP/USD pair this week – it traded in the most expected range – between the support line of 1.62 to the resistance line of 1.6660.
Swinging slowly in the summer breeze, the British Pound was rather easy to trade.
False Breaks on Low Volume
On the other hand, the low volume means that a small number of traders, perhaps institutional traders, can cause extreme moves on some currency pairs. These moves can trigger orders that were set at major technical lines, and this can cause some serious unexpected mess – unexpected breaks of technical barriers.
In normal market conditions, these breaks would lead to long term moves. But since they were based on low volumes, these break don’t persist, and can just erase your money.
An example from this week is the AUD/USD: it fell below the support line of 0.8230. The Aussie didn’t just trade a little below the line, but fell as deep as 0.8160 – 70 pips under! This didn’t last – a few hours later, AUD/USD stepped up, and continued the week in the normal trading range.
So, in this case, the low volume triggered a false break.
Confused? Just wait a little longer
For those of you that are confused with these moves, the best advise is to wait another week. When August comes to an end, so will the low volume trading. All the forex traders will be back on the scene, and forex trading will resume with a more “normal” behavior.Get the 5 most predictable currency pairs