Track Seasonal Trading to Gain an Edge

An astute trader is always looking for an edge. Over the years I have heard some interesting approaches to getting that advantage. Fundamentals move markets, but when there is no new information to influence prices traders often use technical tools and indicators to make trading decisions. The list of trading indicators is extensive. There are some not so prevalent approaches that are deemed mysterious. I recall a phase where lunar cycles became popular in the ’90s. There was a span when lunar cycles, think Friday the 13th or full moons, saw big jumps in volatility.

Seasonality frequently plays a role in trading, mainly for longer-term strategies. All technical indicators or tools have merit and are useful, but none of them give correct signals all the time. Seasonals are viewed as tendencies over a decade or more of statistics. Like all other indicators they are inconsistent. The point is there may be a dominant direction or edge at certain times of the year. Seasonals indicate what markets have done in the past. They do not necessarily dictate what will occur in the future. Tendencies can range from weather events to calendar events. The key is that the tendency is recurring and provides a sustainable probability of performing in a manner consistent to previous results. History does not always repeat, but we can prepare for changes in momentum during certain seasons.

Let’s review some of the more well-known seasonal factors. Trading volume tends to dry up in late June through late August. It makes sense since most people, not just traders, take vacations before the school year begins. It might be wise to short volatility during the dog days of summer.

Turning to the energy sector, crude oil prices tend to firm up in late winter and early spring in preparation for the coming summer driving season. Oil (USO) prices also tend to stabilize or top out around May. Natural gas (UNG) tends to rise in late February and early March. This can be attributed to upcoming demand to cool homes during the hot summer months.

Gold often sees bullish moves in late summer.

Corn and soybeans tend to rally in January and run out of steam in March.

Tracking seasonals may give you an edge, but that advantage increases if you pay close attention to technicals when a market has a tendency to move in a direction.

When markets are ready to rise, they frequently make lows within the first hour of the trading day. Conversely, markets often top out after making highs within the first hour on consecutive days. Such subtle change may help in timing a seasonal move. When looking for a seasonal advantage it is wise to step back and study long-term charts to gain perspective. It is just as important to track a short-term momentum indicator to help time the onset of trend whether it is seasonal or not.

John Seguin, Market Taker Mentoring

Trader Education