Seasonality is a very major force in markets. It can be seen in the stock market. "Sell in May and go away" is one expression of that seasonality. Seasonal influence can also be seen across all commodity markets and commodity spreads as well.
What is seasonality? Simply put, it is a seasonal price trend. It is the propensity of a given market to move in a given direction at specific times of the year.
Seasonality is not limited to the agricultural commodities since seasonality is not just weather and planting cycle driven. Seasonality can also be caused by many other factors including demand and supply for raw materials, consumption trends and cycles.
There are those who claim that seasonality either does not exist or that it does not supply actionable data on which to trade. Only history can judge that argument. I maintain that there is a very large body of evidence that not only does it exist but seasonality is very much alive and well in markets and CAN give you a very large trading edge. I maintain that seasonal strength and weakness is so profound that any trader that does not use them in their work or is unaware of them is at a very distinct disadvantage in their trading. In fact, the reliability of seasonality is so strong that it puts other swing trading methods to shame.
There are many excellent day traders on this site. Traders in oil, the broad market index futures as well as stock and options day and swing traders. There are also traders here who cannot or choose not to sit in front of the screen during trading hours and watch every tick of price movement. Seasonal trading MAY be the answer for you. For the day trader wishing to diversify his trades into multiple trading vehicles on a swing basis to the trader who chooses to swing trade in a longer time frame, free from watching daily price movement, seasonal trading could be the answer. For the pure day trader, consider seasonality as one of your filters as to which setups you trade. You may wish to put less emphasis on a long day trade in a vehicle with weak seasonal tendency and vis-a-versa, for example.
Some filters I use in choosing which seasonal trades to enter are: 1) At a seasonal turn "window", has the vehicle acted seasonally up to that point? If it has, consider the trade, if not, pass on the trade and 2) I ONLY consider seasonal trades with 80+% probability. In the last 15 years, has the trade worked in at least 12 of those years?
Some words of caution. Seasonality is NOT a holy grail trading method! It is as fallible as any other trading method! You MUST use stops. At what price level is it no longer working? Use prudent trade sizing based on those stops! In other words, according to your trading plan, use normal risk control in your seasonal trades. That being said, trading with seasonal tendencies is a sensible and stable approach to swing trading. Nice to have history on your side with an excellent positive trade expectancy.
For those of you who cannot or will not trade futures contracts themselves, futures options (futures trading account required) is one alternative. Also, here is a list of commodity ETFs for those who wish to go with that option. http://etf.stock-encyclopedia.com/category/commodity-etfs.html
In my pantheon of good seasonal traders is Larry Williams. He puts out an annual paper at the first of the year with his top seasonal trades for the year. He also has a mid-year update. These trades tend to work rather nicely. Also, Jake Bernstein does excellent seasonal work. John Person, Mr.Pivot, is also excellent with seasonal work. he is co-author of Commodity Trader's Almanac 2011: For Active Traders of Futures, Forex, Stocks & ETFs (Almanac Investor Series) by Jeffrey A. Hirsch and John L. Person (Hardcover – Nov. 8, 2010). This book is a MUST for seasonal traders and those traders who wish to incorporate seasonal influences in their trading plan.
Put history on your side. If your not looking at seasonal influence now in your trading perhaps you should.
Yours in that constant search for the elusive trading edge,
Market Sniper
