As traders, we might be able to use Seasonal Analysis to help us trade the futures markets. There’s a phrase, "Those who forget the past are doomed to repeat it." When trading, knowing the past and being able to repeat it may not be such a bad thing! Seasonals can sometimes be found by looking back at least 5-years, and picking out the windows of time (the "seasons") where a market has made a move in one particular direction more often than not. Patterns may occur for various reasons but are not guaranteed to repeat.
Remember though, no price pattern is ever guaranteed to repeat itself…past performance is no guarantee of future results.
An example of a seasonal trade window might be the following: From approximately November 20 to December 8, February Crude Oil has fallen 13 of the last 15 years. Then of course there are details such as; what was the largest drawdown (risk), the largest open profit, the average loss/gain per trade, etc. Some of the best Seasonal Analysis studies that we have come across are from the Moore Research Center, Inc. in Eugene, OR.
Futures price patterns can occur on a seasonal basis as well as a non-seasonal basis. Some of the automated trading systems offered by iSystems are designed to automatically trade based on non-seasonal price patterns.
Seasonal Futures Spreads
Spread trading involves following the difference in price between two futures markets. There are intra-commodity spreads that involve the same commodity in different months, and inter-commodity spreads that involve related markets. For instance, an example of an intra-commodity spread would be if you simultaneously bought July Corn at 2.25 and sold December Corn at 2.34, you would have entered the spread at 9 cents. Now you are looking for the spread to narrow, or get closer to zero (more negative) to make a profit. However, losses would occur if the spread were to widen. If you simultaneously liquidated the July Corn at 2.21 and the December Corn at 2.23, you would have exited the spread at 2 cents, thereby making a 7-cent profit per spread (not accounting for commissions). Another way to look at it is you lost 4-cents on the July Corn (2.25-2.21=.04) and made 11-cents on the December Corn (2.34-2.23=.11), which is a net gain of 7-cents.
Some advantages in using spreads are that traders don’t necessarily have to determine market direction. A market may go up or down and a spread can still make or lose money. It is also possible that both legs of the spread can simultaneously move favorably or adversely for the trader. Margin requirements are also usually lower with spreads. However, that does not necessarily mean that a spread always carries lower risk.
For more information on seasonal trading, please consult an Altavest Trading Advisor at 949.488.0545.