Seasonal analysis has long been the domain of professional traders, but over the last decade or so has slowly been picked up by the private investor.

Good information on seasonal trading is still hard to come by, but that in itself in a good thing as it is still a niche that can be exploited. This article looks at:

	What is Seasonality?
	What Drives Seasonal Patterns?
	Technical vs Fundamental analysis
	The Opportunities in ‘Spread' Trading
	The DOs and DON'Ts in Seasonal Trading
	How to Learn More

 

Firstly, What Is Seasonality?

Seasonality refers to a pattern that depends on, or is controlled by, the time of the year. Seasonality appears in many places.

For example, sales of Christmas cards logically peak before Christmas. Accounting business peaks around end of financial year. Sales of red roses peak just before 14th February. Many businesses, products and statistics are subject to seasonal variations. For the trader, it can mean opportunity.

What Drives Seasonal Patterns In Markets?

The answer is the same as that for the price of anything - supply and demand. Consider the demand for beef. In any economy, demand is greatest when the weather is the coolest. Logically more people eat roast dinners in the winter than they do in the summer. While demand for beef is high during BBQ season it tends to be less than good old home cooked dinner demand. On the supply side, during winter, weight gain in live cattle is low. So during the US winter, demand is high and supply is tight. This translates a seasonal variation in price. With a well timed trade, you can make money from this.


Source: eSignal - www.esignal.com

Another example is coffee. Coffee consumption is far heavier in the Northern than in the Southern Hemisphere and heavier during winter than summer. Thus, after March, consumption begins to slow. Furthermore, harvest in the Southern Hemisphere normally begins in June. Thus, producers tend to liquidate inventories before then, making less desirable deliveries against May futures - which begin April 20. This creates a short selling opportunity.



Source: eSignal - www.esignal.com

Seasonal Trading: Is This Fundamental or Technical?

Among many traders it seems important to define whether you follow technicals or fundamentals.

Technical analysis is the study of price trends and patterns. It is sometimes called charting - although strictly speaking charting is a subset of technical analysis. Fundamental analysis is more concerned with analysis of supply or demand factors that it is charts.

So what is seasonal analysis? Well there are two ways to look at it. On one hand, you can say seasonal analysis is fundamental since it looks at shifts in supply and demand at any time of the year. In the above examples we looked at seasonal factors from the point of view of fundamentals. The examples considered harvest and production cycles, weather and consumption demand. These are fundamental factors that analyse supply and demand.

You can also look at seasonal trading from a technical point of view since it is an analysis of price patterns in the market. These price patterns can be recurring and present trading opportunity. Identifying recurring patterns is the basis of technical analysis and you could therefore consider seasonal analysis to be a type of technical analysis.

There is no correct or incorrect way to look at this. All traders have their preferences.

Some Real World Examples

Here are some examples of recent trades based on seasonal analysis:

The DO's and DON'Ts of Seasonal Trading

	DO find a good information source. Unless you are a Quantitative Analyst and a super-wiz with Excel, you need to get the seasonal data from somewhere.
	DON'T use seasonal data for trading outright futures contracts. Consider looking at spreads. The signals tend to be more reliable.
	DO find a good broker - one that knows about how to place spread orders effectively.
	DON'T use seasonal data in isolation. This is where a lot of people come unstuck. Seasonal data is just part of the trading equation.
	DO keep some perspective. You can learn a lot from the right broker, but having the right information and following a plan is the best course of action.
	DON'T get too caught up with the vernacular of seasonal spread trading. It's less important than getting the right info and placing trades accordingly.
	DO have a look at my paid newsletter. My analysis combines seasonal, technical and fundamental data as well as money management principles to deliver high probability trading ideas with complete training support.

Get Seasonal Trades

 

Learn More About Seasonality

 

You can learn more about seasonal spread
trading from the 3rd edition of my my eBook
"Guide to Futures and Spread Trading".
Click on the image to download.

 

 

Disclaimer: There is a Risk of Loss in Futures Trading
DISCLAIMER HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. THE RISK OF LOSS IN FUTURES TRADING CAN BE SUBSTANTIAL. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST PROFITS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THERE IS A RISK OF LOSS IN FUTURES TRADING.THE INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, HOWEVER IT CANNOT BE GUARANTEED AS TO ACCURACY OR COMPLETENESS, AND IT IS SUBJECT TO CHANGE WITHOUT NOTICE. IT SHOULD NOT BE ASSUMED THAT THE SEASONAL PRICE TENDENCIES SHOWN HEREIN OR THAT THE SUGGESTIONS REGARDING THEIR USE WILL BE PROFITABLE OR THAT THEY WILL NOT RESULT IN LOSSES. PROTRADER LLC, ITS MEMBERS OR EMPLOYEES ASSUME NO LIABILITY IN CONNECTION WITH THE USE OF THE INFORMATION CONTAINED HEREIN.