The Concept of the January Effect

In the foreign exchange market, there is a saying that goes “Whatever happens in January, happens for the rest of the year”.   It describes the regular phenomenon that happens on the start of January, the January Effect, when a spike in currency prices is recorded. It follows a similar event in December, the December Effect, when currency prices are said to have dropped. Especially if you’re quite new to the forex market, you may want to ask: “Is the phenomenon exclusive to the month of January?”   An Introduction to the January Effect

  The January Effect refers to the calendar-related anomaly when sellers choose to take the forex market by storm in January. After currency prices plummeted to the ground during an earlier period, investors insisted on capitalizing; when the different currencies were available for a low price, they would buy a supply, then, according to their strategy, they would sell it on the market for a higher price. Moreover, the January Effect supports the idea that in many cases, the events in January can be used to predict eventual possibilities with reasonable accuracy. As the dynamics in the forex market, as well as in most financial markets, goes, some exchanges, as well as the people behind the exchanges, follow a trend, and it is up to you to “float on”.   History of the Term   The term “the January Effect”, is a reference to the positive (for sellers) performance on the forex market. At the passing of the previous year, some people observe / measure market activity; by others, the phenomenon is called as “the January Barometer”. It can be traced to the fact that for various celebratory reasons, many end-of-the-year promos are granted at the beginning of a new year; in most situations, the majority of those promos are used as resources to buy currencies in the forex market.   Additionally, the term “the January Effect” was said to have been coined by income tax-sensitive people. It follows that there are individuals who hold small investments, and they are left with nary a choice but to sell their currencies as the year draws to an end; for them to be granted capital loss, they have to sell their currencies, and if they are interested in re-gaining them, they may begin re-investing at the start of the year.   What Awaits the Currency Trader?   The concept of the January Effect isn’t fool-proof. Over the years, specifically in the years 2011, 2009, 2002, and 1998, not a notable event in January was reported. However, it gives the currency trader a great idea of the condition of his selected currency; it informs him of the strength, weakness, and overall stability of a currency. For instance, he plans to profit from the JPY (or Japanese Yen) for an exchange in August; one of the more practical strategies is to look at the records of the JPY from January until August.   Written and provided by Mr. John, a Forex expert and analyst. You can find his more articles here and a few here 

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