Since your emotions play a major role in trading, it is not surprising that the weather has a significant effect on your daily investment behavior. While sunshine brings a smile and positive attitude towards the future, and rain usually makes us somewhat depressed and sleepy, let’s look at ways the change in weather can dramatically influence your forex decisions.
It might be odd to talk about weather on our forex blog, however you have to agree that knowing your weaknesses only make you stronger! And even if at first glance this topic sounds like a complete nonsense, we are here to discuss how individual investors’ mood affects your decision making.
The connection between sunlight and the rising markets is difficult to believe in, however there is a solid analytical research with very convincing facts provided by Mitra Akhtari of the University of California, Berkeley, in a paper titled “Reassessment of the Weather Effect: Stock Prices and Wall Street Weather.
Sun makes us irrational!
Apparently we turn into wild animals on sunny days! Everything seems more cheerful and the world is full of possibilities. All that summer happiness is useful when you are on the beach with a cocktail in your hands, and much less promising when you tend to take more risks, open more positions and ignore your trading plans just because the sun is shining.
So whenever you are humming “Get Lucky”, followed by “Blurred Lines”, time to look outside that window and think hard whether your “happy-go-lucky” attitude is really because the market is smiling at you, or rather because it is so nice out. Grab a cocktail and go to the pool instead of making dreadful decisions!
Stock prices climb up on summer days
Sun affects all of us and brings not only individual impact but also wide market effect. In the last 4 decades, stock prices tend to climb up on a sunny day and go back down when the skies filled up with clouds.
Another interesting fact related to weather mood swings and investment, the above mentioned effect is goes full swing during the financial instability. The last global financial crisis in 2008 is a great example of such.
Newbies are at more risk from the sun exposure!
When experienced traders know better not to rely on luck and cheerful mood, beginners are completely another story. Most newbies see sunshine as a sign of true optimism and “let’s-try-my-luck-today”.
Automated trading is immune to the sun
One thing is apparent – traders who rely on algorithms and trading robots tend to overcome the weather changes without major slap on their trading behavior and results. The automated programs do not have an urge to buy when the sky is clear and sell when the clouds block the sun.
How to use Weather Changes for your own good in Trading?
What does this all mean to you? Do you need to buy puts now whenever it is a rainy day? Definitely not, however understanding how weather affects your positive or negative attitude during the day and impacts your investing decisions is important for controlling the emotions and strengthening your self-analysis.
While the bigger players are not affected by weather changes, all of us, individual investors, should make it clear – learn to control the psychological aspect of investment to be alongside with the pros. Otherwise a seemingly sunny day can bring an unwelcomed storm into your live.