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Seasonal Futures Trading

There are seasonal commodity trends that may reoccur within the futures trading market. This could help guide traders and build a plan for a seasonal futures trading strategies.

Trading Commodity Seasonal Patterns

When we talk about seasonal patterns in futures, we’re referring to certain conditions and events that repeat annually. Perhaps the most obvious of these is the annual cycle of weather from warm to cold and back to warm. However, the calendar also marks the annual passing of important events, such as the due date for U.S. income taxes every April 15th. Enormous supplies of grain at harvest dwindle throughout the year. Demand for heating oil typically rises as cold weather approaches but subsides as inventory is filled. Monetary liquidity may decline as taxes are paid but rise as the Federal Reserve recirculates funds. Such annual events create yearly cycles in supply and demand.

Seasonality of Futures

These annual cycles in supply and demand result in seasonal price movement - to a greater or lesser degree and in a more or less recurrent manner. In other words, an annual pattern of changing conditions may cause an annual pattern of price responses. It could be defined as a market's natural rhythm, or an established tendency for prices to move in the same direction at a similar time every year. As such, it becomes a valid principle subject to objective analysis in any market.

In a market strongly influenced by annual cycles, seasonal price movement tendencies may become more than just an effect of seasonal cause. It can become so ingrained as to become nearly a fundamental condition in its own right - almost as if the market had a memory of its own. Why? Once consumers, producers, traders, and the like fall into a particular pattern, they tend to rely on it-almost to the point of becoming dependent on it. This dependency can be tricky as such trading patterns do not repeat without fail. The seasonal methodology, as does any other, has its own inherent limitations. For instance, some summers are hotter and dryer than others thus leading to less of a supply than what was predicted for the fall. Even trends of exceptional seasonal consistency are best traded with common sense and caution. A basic familiarity with current seasonality fundamentals and a simple technical indicator will help enhance selectivity and timing of entries and exits.

Seasonal Futures Spread Trading

Seasonal patterns can have an added degree of conviction. In markets affected by annual cycles, seasonal price movement may become more than just a response to seasonal factors. It can become so regular as to become nearly a fundamental behavior in its own right --- almost as if the market had a memory of its own. This can occur once consumers and producers fall into a pattern. Both parties tend to commit to a perceived inevitability. That can translate to fundamental events on the part of consumers and producers that coincide with these seasonal patterns and can provide even greater confidence in those patterns.

As with all approaches to trading, following seasonal patterns has its limitations and shortcomings. Seasonality is based on the timing of events that come with irregularities. One obvious variability is the weather. Some summers are hotter and dryer --- and at more critical times --- than others. Winters can be colder or milder. Other fundamentals annually ebb and flow as well. On top of that, analyzing seasonal patterns calls for a look back in history, which begs the question: how far back will produce a favorable sample size? Would five years of more-or-less similar price movement provide a high enough degree of confidence that a seasonal pattern exists from which to trade? Would ten years provide twice the confidence? What about noteworthy fundamental changes that evolve over many years?

There are some very good sources for mor information on seasonal patterns. One noteworthy source is The Moore Research Center, Inc. As is always the case when we share information like this, it’s important to formally square up our discussion with the always-important information: following seasonal patterns isn’t without its risks. Even with regard to the annual cycles referenced above, which will inevitably ebb and flow both daily and longer term – no seasonal pattern repeats without fail. Make sure you’re aware of the risks to trading based on seasonal patterns as you should with any futures trade. The content in this piece includes material written by Jerry Toepke and excerpted from, Trade Your Way to Financial Freedom (Van K. Tharp, New York, McGraw-Hill, 1999). Also included are passages written by Moore Research Center, Inc., copywrite 1998-2012, Moore Research Center, Inc.

Disclaimers:

* Past results are not necessarily indicative of future results. The risk of loss in the futures trading market can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

** SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MORE CONSISTENT COMMODITY FUTURES SEASONAL THAT HAVE OCCURRED OVER THE PAST 15 YEARS. THERE ARE USUALLY UNDERLYING FUNDAMENTAL CIRCUMSTANCES THAT OCCUR ANNUALLY THAT TEND TO CAUSE THE FUTURES TRADING MARKETS TO REACT IN A SIMILAR DIRECTIONAL MANNER DURING A CERTAIN CALENDAR PERIOD OF THE YEAR. EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES, AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY IMPACT ON THE RESULTS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST OR WILL IN THE FUTURE ACHIEVE PROFITS UTILIZING THESE STRATEGIES. NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE.

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