The September Effect : The Ghost Around the Corner ?

Today we have started the month of September, a month which is usually filled with interesting and decisive economic movements that have very important consequences in the long term for the world’s largest economies. What is so special about the month of September ? What is the “September effect” market analysts talk about ? On today’s post I will talk a little bit about September trading and the movements that usually take place within this month, I will explain what the September effect is and what it means to the regular world citizen and – more importantly – to the professional forex trader.
September has many unique characteristics that make it an important month, above all others its most important quality seems to be that it is the first month after summer trading and the first month of the last quarter of the year. This means that a combination of factors happen within September that are not present in any other month. First of all, this month starts right after the release of the third quarter’s economic data and second, it happens after a regular decrease in volume over the summer trading months. This means that September usually sees a large increase in volume when compared to August, most of the time accompanied by important directionality since institutional traders adjust their positions to whatever economic news were released in the previous 2-3 months.

However this inherent qualities of September are not – by themselves – what market analysts call the “September effect”. This phenomena has a much darker side which is related to the fact that September has always seen the beginning of major economic depression and recession periods in the United States. Since September sees a surge in volume with high directionality it is easy to see why panics can easily happen and lead to sell-offs during this and the following months if sentiment and risk aversion are at the right place. The “September effect” has earned its name based on the economic data of the past 150 years, the crisis in the end of the nineteen century, the 1929 depression, the 1987 stock crash and the 2008 global crisis all began in the month of September.

After the United States went through several market cycles that seemed to reach abrupt and dramatic ends in September, it seems that this is not a mere coincidence but the consequence of a series of factors that caused this to happen. What is important right now – under our current economic conditions – is if we will see a double dip (a second recession period) this year as a consequence of deteriorating conditions in the US. Definitely September is not a very good month to get into buy and hold assets (like stocks) since -if a recession is bound to happen – it would start in September and we would be getting into these assets at their highest price before they drop like a rock when risk aversion peaks and we see massive sell-offs in these markets.

The most prudent position for longer term buy and hold investments right now is to remain on the sidelines – until calmer months like November arrive – and to focus on investments that could potentially get profit if such a breakdown period starts (not trying to predict that it will start but getting in quickly if it does). In forex trading we get a very good opportunity to do this since a surge in risk aversion and massive sell-offs in the stock market trigger massive buying of US safe haven assets (government issued bonds) that require exchanging foreign currency to US dollars. So in the end- for us in forex trading- sell-offs in the stock market are a good thing in the sense that they mean strong directionality and an almost always easy opportunity to profit from these massive trends.

It is interesting how most commercial system sellers take praise in the fact that their systems “survived” the 2008 economic crisis when this was one of the most profitable and easiest to trade periods for almost all the mechanical systems out there. Trend following systems – like those in Asirikuy – would have made very large amounts of money within that very directional market. In the end what matters to us in forex is directionality and this type of periods allow us to take advantage of fast-developing and “easy-to-follow” market conditions.

Of course, I am not wishing for an economic crisis, that would be utterly cruel and unethical as it is also possible to profit from trends that are generated as signs of economic recovery. What I am saying here is that the “September effect” is a reality and that you should be aware of this fact when you take decisions regarding your investments and asset allocation for this month. This is especially important when housing and other data from the third quarter was importantly disappointing and the chances of a double dip stand now at an almost 50/50 (for some economists at least). You should be aware that there is a real risk that the September ghost will take its toll, so be prepared, take intelligent investment decisions and follow the market in whatever way it develops.

If you want to prepare to follow a possible developing trend and you would like to learn how you too can code your strategies and use systems that have adequate analysis and realistic profit and risk targets please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general . I hope you enjoyed this article ! :o)

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