Astronomy and financial markets - is there any connection?
Dear Traders,
Biological and psychological research of the past suggests that lunar phases might affect human behaviour and mood.
I am a price action trader who has never tested these claims in practise…
...but I do know some things and facts that I think connect astronomy to the stock market in general.
Unlike astrophysics, the astronomy is a pseudo-science that is, nevertheless, used by many people in their business – most importantly, trading.
So let's find out once for all.
Are Forex and astronomy connected in anyway?
Fibonacci and the golden ratio in nature
The origins of the Fibonacci sequence and golden ratio in Forex are well-known to the architects, artists and technical analysts.
However, the importance of the golden ratio was recognised further back in ancient history, definitely as far as the Greeks…
...and, depending on which source is read, as far back as ancient Egyptians and Sumerians.
However, evidence for the latter is tenuous at best.
There are many volumes that look at the interesting properties and occurrences of this ratio in nature.
Some key examples of this are the famous nautilus shell chambers, the sunflower head seed pattern and a galaxy spiral.
In architecture, the Parthenon of Phidias has a length/width ratio that is seen as the epitome of classical proportion.
In other art forms such as fresco and oil painting, these proportions are often seen in the works of Leonardo da Vinci and Salvador Dali.
An even better example is a human ear – its length needs to be 1.618 greater than the width to be "in proportion."
This corresponds to the relationship between limbs and the ratio of the navel to the feet and total height, as seen in the works of Le Corbusier (Charles Edouard Jeanneret).
Fibonacci and the golden ratio in Universe
New research on this subject claim that the golden ratio - 1.618 - can be applied not only to mathematics…
...but also to physics, chemistry, biology and the topology of space-time.
Spiral galaxies such as our Milky Way also follow the familiar Fibonacci pattern.
The Milky Way has several spiral arms, each of them a logarithmic spiral of about 12 degrees.
As an interesting aside, spiral galaxies appear to defy Newtonian physics.
As early as 1925, astronomers realised that, since the galaxy's angular speed of rotation varies with distance from the center, the radial arms should curve.
The impact of moon cycles on the market
Source: www.davidmcminn.com
The diagram above shows the ecliptical position of the north node at the time of all major crises listed by Kindleberger (Appendix B, 1996) for the period 1755-1940.
For crisis years with no given month, the north node is taken as occurring on July 1.
For crises given as multiple months, the north node is timed midway between the first and the last crisis month.
David McMinn states that the concentration of the north node in the segments 0 - 45 Eo & 180 - 225 Eo for the timing of major financial crisis is probably linked with the equinox points 0 Eo/180 Eo, where the celestial equator intersects the ecliptic.
As the Moon's nodes move retrograde (clockwise) around the ecliptic, major financial crises are most likely to happen in the few years prior to the lunar nodes reaching the equinoxes.
Other studies suggest the results for mean daily returns around the full moon
and the new moon dates from January 2004 to December 2010 can be seen in Table 3 and Table 4 after considering both financial crisis events.
Specifically, the difference between stock returns of the new moon days and full moon days before and during the crisis are volatile, from around -50% and up to 97%.
In Table 3, the overall mean daily returns around the new moon are higher, compared to the mean daily returns around the full moon…
...except for the country of Jordan.
However, the results in Table 4 show that during the crisis the results for five countries, Argentina, Brazil, China, Malaysia and Mexico contradicted.
The results of the effect of the lunar cycles is not statistically significant on the returns.
Source: Jeeir.com
How it works: Relation between lunar phases and human body
The human body is about 75 percent water and people often ask whether tides are at work inside us.
The moon and the sun combine to create tides in the Earth's oceans.
In fact, the gravitational effect is so strong that our planet's crust is stretched daily by these same tidal effects.
The ocean on the side of Earth facing the moon gets pulled toward the moon more than the center of the planet does.
This creates a high tide.
On the other side of the Earth, another high tide occurs, because the center of Earth is being pulled toward the moon more than is the ocean on the far side.
The result essentially pulls the planet away from the ocean.
Tides are large-scale events, but within human body there is enough water to cause similar effects on a smaller scale.
Let's look at them below.
Lunar phases and emotions in animals: The primal instinct
For millennia, humans have wondered if the Moon pulls at us with something more than its reflected light.
Pliny the Elder observed that, in combination with the Sun, the Moon draws up the tides.
Pliny and his compatriots also argued that this lunar force – now known as gravity – pulls on the moisture in our bodies, within our watery brains.
That can cause a misbehaviour with animals and some researchers have found that lion attacks on humans were most likely in the 10 days after the full moon.
Other studies also suggested that:
- rabbits might stay close to their burrows during the full moon, which they did
- during a new moon in some parts of the world, coyotes howl as a group
- cheetahs and Wild dogs seemed to be more active at night during moonlight
- corals are releasing their gametes at once, a few days after the full moon
- marine iguanas travel from their resting spots to graze for algae at low tide.
The conclusion of studies is that most species have the innate clock that works synchronous to the moon cycle…
...even if the Moon is not visible.
How lunar cycles can affect human behaviour
You've probably read many times before that full-moon nights are full of accidents, injuries and people in distress.
I want to underscore how important the effect on human emotions generally is and that maybe, in some sense, it can be connected to our subconscious patterns that are engraved within animals and humans alike.
You can call these patterns instincts.
So, can those instincts go haywire on lunar cycles?
- In 2007, senior police officers in Brighton announced that research had found a correlation between violent crime and the full moon.
- In Sydney, psychiatric patients show similar levels of violence and aggression throughout the lunar cycle.
- Meta-analysis of 37 studies found that the lunar effect accounted for less than 1% of variation in behaviourermed 'lunacy'.
- Bright light of the full moon deprived people who were living outside, including many who had severe mental disorders, of sleep.
Finally, despite a persistent belief that our mental health and other behaviours are modulated by the phase of the moon…
...there is no solid evidence that human biology is in any way regulated by the lunar cycle.
On the other hand, it seems that it might affect the human behavioral pattern.
Some people can be more emotionally calm while other might appear ecstatic.
Lunar cycles and the Forex market are even more emphasised during the full moon due to potential changes in behavioural patterns of traders.
In that case, don't forget the spiral of emotions and use the volatility protection when trading.
Your emotions are you worst enemy and if you can't control your emotions you won't succeed in trading.
Trading Moon cycles and related folklore debunked?
A deep study comparing a Moon Phase Strategy (MPS) versus a Sit and Hold Investment strategy on US Equities showed mixed results during back-tested results.
The limitation of the study is that the index performance can be impacted by dividends paid out, which the study fails to recognise.
Nonetheless, the MPS strategy didn't turn a negative result to a positive result during the bear year of 2008.
The conclusion is that markets are driven by financial facts and expectations…
...rather than by the motion of celestial bodies.
The exception can be a proof that financial developments in macro and micro scale are caused by the motion of celestial bodies.
We haven't seen that study ever since.
I have been a long time member of the Forex Factory.
There, I've seen many threads devoted to, for example, astro trading and planetary cycles trading.
Feel free to navigate and find if this kind of trading can be beneficial for you.
Conclusion: Astronomy impact on Forex and Financial markets
As cosmos impacts the earth, there are still handful of techniques to keep your psyche in check and refrain from reckless decision making caused by cosmic activity.
After all, what I have been trying to show is that the lunar cycles cannot determine the outcome of Forex and stock trading…
...but they may affect the individual mood and thinking, which may lead to changes in the stock market.
From a trader's perspective, it is clear to me that further research is required in the field of behavioral finance to examine the relationship between lunar cycle and investor behavior.
Cheers and safe trading,
Nenad
