The 'Weekend' Effect in Forex

By McEwan, Ron | Futures (Cedar Falls, IA), April 2002 | Go to article overview

The 'Weekend' Effect in Forex


McEwan, Ron, Futures (Cedar Falls, IA)


MARKET STRATEGY

Considerable attention has been given to seasonal and weekday effects of forex prices. The hope is that by discovering patterns, you can exploit the trading opportunities they present. While transaction costs may limit returns, day-of-the-week patterns can provide useful insights into market dynamics.

But such tendencies are not magic, and correctly analyzing their performance as part of a comprehensive trading plan requires a good understanding of statistics and often a working knowledge of calculus. Another drawback for most analysts is the need for software capable of processing the data and performing the necessary calculations. However, you don't need to be a rocket scientist simply to glean helpful market information from these patterns.

With a less-sophisticated but reasonable approach using standard spreadsheet software, our results reveal that the sample data suggest a "weekend" effect exists in currency prices and any exploitable pattern in price movement is worth exploring. Going a step further might unearth the cause of the relationship, which would better support estimates of when to expect the anticipated move.

One theoretical cause centers on the concept of how news or information is processed over non-contiguous trading days. The anticipation of and inability to act on information during the non-contiguous trading days could affect investor psychology and bias trading decisions accordingly. This goes along with the belief that "good" news is released during the week when it can be acted on and that "bad" news is released on weekends when it is more difficult to respond to. Another belief is that because less information per day arrives on weekends, the overall effect on forex rates is greater than during the week.

Though neither explanation adequately fully explains the weekend effect, it is an economic anomaly that can be explored and exploited with some basic data-mining statistical techniques.

The data used in this study consist of daily forex prices with daily returns of each market calculated for the first differences of the data. …

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