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Seasonal Patterns of Financial Markets - Detailed Guide

February 05, 2021 08:35 UTC
Reading time: 17 minutes

Traders and investors in financial markets use a variety of techniques to outsmart markets and succeed. Some of the most popular methods of analysis include technical and fundamental analysis, but there are market participants who seek and study the behaviour of different financial instruments at different times of the year - these are the so-called seasonal patterns of financial markets.

Interested in knowing more about these seasonal patterns of financial markets? Then you’re in the right place.

 

Let's not waste any more time. Let’s begin!

seasonal patterns of financial markets

What are seasonal patterns of financial markets?

BOX A seasonal pattern of financial markets, or a seasonal trend, refers to specific time periods in which the prices of certain financial instruments behave similarly, thus forming a trend. The important thing is that these trends are repeated and create a stable probability of happening again. BOX

It’s considered that any regular price fluctuation or trend repeated within a one-year cycle is seasonal. These seasonal patterns of financial markets can vary depending on:

  • Calendar periods of the year (seasons, months, weeks)
  • Expected events (company reporting periods, economic news, etc.)
  • Climatic conditions (colder winter, warmer summer, etc.)

Most often, seasonal patterns of financial markets are calculated as the average profit or loss for a given period of the analyzed financial instrument (example: gold rose by an average of 5% in January) or simply as a net positive or negative performance (example: EUR/USD fell in 8 of the last 10 Februaries).

Such seasonal patterns of financial markets can be found in almost every financial market - from Forex, through commodity markets and to the stock market. Some of the more popular models that are most commonly associated with stock markets are:

  • "Sell in May and run" - associated with the sale of shares in May and return to the market in October
  • The Christmas Rally - the end of December is often a strong time for US stock markets
  • "January effect" - can often be a kind of price increase in shares at the beginning of the year

Some financial instruments for which seasonal models are even more important are agricultural raw materials. In these, the usual supply and demand models at certain times of the year should be key factors in making trade decisions.

How are seasonal patterns of financial markets formed?

Perhaps one of the most interesting and controversial issues when it comes to seasonal patterns of financial markets are actually the reasons behind them. Could this market seasonality just be coincidence?

Rather not. In fact, there are real reasons behind these seasonal trends and some of them may include:

  • Most human activity also has seasonal cycles
  • People's moods at different times of the year (i.e. holidays)
  • Changes in the supply and demand of a financial asset
  • Payments in specific seasons (for example, at the end or beginning of the year)
  • The release of news (for example, the periods in which the quarterly financial statements of companies are published)
  • Harvest period
  • Period of severe climatic conditions (high or low temperatures, storms, etc.)

Because financial markets are created by people and involve people, there’s no way that the above-mentioned factors that affect a person's daily life won’t have an impact on the prices of financial assets.

Why trade seasonal patterns of financial markets?

You've probably heard the saying, "He who does not remember the past is doomed to repeat it." And people seem to tend to quickly forget past events. From a philosophical point of view, this may be one of the reasons why seasonal patterns of financial markets continue to happen.

But, let's look at whether other factors can motivate you to use seasonal trends in your trading in the financial markets. Here are some of them:

  • Asset prices on financial markets are very often subject to natural processes
  • After a situation has been repeated many times in the past, it is likely to happen again - the change of seasons, the payment of taxes in certain periods, the publication of company reports, etc. are very likely to occur at the same time
  • One of the few methods that can be used to forecast financial markets is past data analysis. Technical analysis also uses past data
  • It's a good idea to use several analysis techniques to validate your entry/exit signals. Seasonal market patterns and charts can be included

Of course, seasonal factors cannot guarantee you success in trading and investing (in fact, there is no such method that can do this). But, they can definitely point you to certain trends or filter out the signals that other market analysis methods give you.

How to find seasonal patterns of financial markets?

Now you know what seasonal patterns of financial markets are and why you should use these seasonal trends in your trading. But, when you have thousands of financial instruments that you can trade with brokers like Admiral Markets and you need to find seasonal dependencies, it can be a little tricky. What you need is:

  • Enough historical data (you can find it on the MetaTrader platforms)
  • Basic knowledge of mathematics
  • Basic knowledge of statistics

Of course, the question may arise as to what periods you should use to analyze seasonal trends. Ten, fifteen, twenty years or the whole available history?

Fifteen is usually a good compromise, but it is also very helpful to look at fewer or more years, such as five or twenty years, to see the changing trends in history.

It is useful to remember two rules when looking for seasonal patterns of financial markets:

  • The longer the period you analyse, the more likely the trend is to repeat, but there will be fewer trends detected
  • The shorter the period you analyse, the weaker the trend, but the more open trends there will be

Decades ago, before the advent of computers and trading platforms, it was extremely difficult to find the seasonal trends you needed.

But nowadays, easy access to market data and the power of computers can get the historical data of a financial instrument with the click of a mouse - by opening a trading platform. Of course, you can find websites on the internet that provide this information in advance, but much of it is for a fee.

How to trade seasonal patterns of financial markets?

To start trading market seasonality, the most important thing is to have a platform that gives you access to many different financial instruments and data for the longest possible periods in the past. MetaTrader 5 can do a great job for these purposes.

If you haven't downloaded it yet, you can download MetaTrader 5 now, completely free, by clicking on the banner below:

Trade With MetaTrader 5

With MetaTrader 5 from Admiral Markets, you get access to over 8,000 financial instruments, such as:

Once you have access to the necessary financial instruments, let's see what are the opportunities to use trading seasonality models in your trading strategy. They include:

  • Opening a long position in a related instrument before a strong seasonal period of a financial asset
  • Opening a short position in a related instrument before a weak seasonal period of a financial asset
  • Use seasonal trends as an additional component to your manual or automated trading strategy

It is not very appropriate to trust only one technique or method of analysis when opening/closing trades. One way to diversify analysis methods is to add a filter to seasonal trends to further clear their entry/exit signals or to use trading seasonality models as a filter for other trading techniques.

In addition, we have already mentioned that it may be appropriate to use several different periods to analyze seasonal patterns of financial markets, such as 2, 5 and 20 years, or even three: 5, 15 and 30 years.

In this way, you will find a short-term seasonal trading trend, a medium-term seasonal trading trend and a long-term seasonal trading trend, which can be useful in making business decisions.

But let's look at which seasonal trading models are good to keep in mind with the different financial instruments.

Seasonal patterns of financial markets - Raw materials

There are four main types of raw materials traded on the markets that shape the appearance of the raw materials market. These four types are:

  • Agricultural raw materials: These include raw materials such as sugar, cotton, coffee, cocoa and others
  • Energy raw materials: These include products such as oil (WTI and Brent) and natural gas
  • Metals: This includes precious metals such as gold, silver and platinum, but also base metals such as copper
  • Raw materials from animal husbandry: These include pork bellies, live cattle, as well as various raw meat materials

The reasons for the formation of market seasonality in raw materials seem the most obvious. They can be:

  • Harvesting
  • Climate change
  • Consumer habits

Seasonal models for raw materials can be found almost everywhere: for metals, energy raw materials, agricultural raw materials, and others. Let's look at some of the most popular of them.

Seasonal patterns of financial markets - Gold

The most-traded valuable target in the world is definitely gold. The yellow metal is no exception to seasonal trends in raw materials. On fact, on the contrary. In the following image you can find a graph of how the price of gold has moved over each month for the last 20 years (until December 31, 2019):

seasonal patterns of financial markets gold

Source: Equityclock.com

The following conclusions can be easily drawn from the graph above:

  • Gold is traditionally strong at the beginning of the year - in January and February
  • Gold is usually traded in the range from March to July
  • Gold is traditionally strong in August and September

Seasonal patterns of financial markets - Oil

Oil is the most traded commodity in the financial markets and also forms seasonal charts that may intrigue some traders and investors. In the following seasonality chart you can find a graph of how the price of WTI (West Texas Intermediate) crude oil has moved in each month for the last 20 years (until December 31, 2019):

seasonal patterns of financial markets oil

Source: Equityclock.com

The following conclusions can be easily drawn from the graph above:

  • WTI oil prices often rise for most of the first half of the year (February - June)
  • WTI is traded mainly in the range between July and September
  • The last quarter has traditionally been weak for WTI oil

For most other commodities, different seasonal trends can also be found to help traders make decisions about entering and exiting trades in these specific markets.

Seasonal patterns of financial markets - The Forex market

The foreign exchange market (Forex, also called FX) is a global decentralized market for currency trading. Forex is the largest financial market in the world and according to the latest three-year report of the Bank for International Settlements, it trades approximately 6.6 trillion dollars every day.

The most traded currency pair in the world, perhaps quite logically, is EUR/USD and on the following seasonality chart you will find its market seasonality performance every month for the last 20 years (until December 31, 2019):

seasonal patterns of financial markets forex eurusd

Source: Equityclock.com

The following conclusions can easily be drawn from this graph:

  • EUR/USD is often weak at the beginning of the year - January and February
  • EUR/USD traditionally bottomed out in November and performed strongly in December
  • March-April seems to be a relatively good period for EUR/USD, as well as the month of September

For other currency pairs that are traded on the Forex market, seasonal trends can also be found and of course, the strong and weak periods are likely to be different.

Seasonal patterns of financial markets - The stock market

The stock market is a collection of various markets and exchanges, where regular activities for the purchase, sale and issue of securities are carried out. Such financial activities are carried out through official exchanges or over-the-counter markets, which operate according to a certain set of regulations.

Although, in most cases, the term stock market is mainly associated with stock trading, it also trades other financial securities such as:

Some of the most popular seasonal patterns of financial markets are in the stock markets. We have already mentioned some of the stock market patterns, such as "Sell in May and run", "Christmas Rally" and "January effect".

In the seasonality chart below, you can find a market seasonality presentation of the broad US S&P 500 index each month for the past 20 years (until December 31, 2019):

seasonal patterns of financial markets stocks

Source: Equityclock.com

From the graph above you can easily reach the following conclusions about this seasonal stock market pattern:

  • The index is usually strong in the last quarter of the year and in the last and first days of the year (Christmas rally and January effect)
  • The March-April period is traditionally strong for the S&P 500
  • From May to September S&P 500 is most often traded in the range (Sell in May and run)

With other stock indexes, you can also find similar patterns in the stock market and trending stocks that can help you make decisions about trading in the stock markets.

You can test trading seasonal stock market patterns without risking equity with a demo account from Admiral Markets. Get your free demo account now by clicking on the banner below:

Trade With A FREE Demo Trading Account

How to start trading seasonal patterns of financial markets?

Now, you know what seasonal investing and seasonal trading are, why to use these seasonal trends in your trading and already know some seasonal commodities, Forex and stock markets. It's time to move on to the more interesting, practical part - namely, to start seasonal trading or seasonal investing.

You can do this in just three steps:

For more information on how to open a trading and investment account with Admiral Markets, watch the following short video:

Let's give an example of how to buy/sell using seasonal patterns of financial markets as our strategy using an instrument like gold.

How to buy gold?

  1. Log in to your account with Admiral Markets (MT4/MT5/WebTrader/Mobile application)
  2. Go to Market Condition
  3. Look for the financial instrument related to gold that you want to buy
  4. Right-click the tool and then select "Graph Window"
  5. Once the graphic appears, click on the "New Order" button (in the Toolbar below the menu)
  6. Select the number of lots in the Volume field, as well as stop loss and take profit levels if you want to place these
  7. Click on the blue "Buy on Market" button

When you open a purchase (long position) you expect the gold and the instrument you bought to appreciate so that you can potentially profit from your trade.

How to sell gold?

  1. Log in to your account with Admiral Markets (MT4/MT5/WebTrader/Mobile application)
  2. Go to Market Condition
  3. Look for the financial instrument related to gold that you want to buy
  4. Right-click the tool and then select "Graph Window"
  5. Once the graphic appears, click on the "New Order" button (in the Toolbar below the menu)
  6. Select the number of lots in the Volume field, as well as stop loss and take profit levels if you want to place such
  7. Click on the red "Market Sale" button

When you open a sale (short position) you expect the gold and the instrument you bought to become cheaper so that you can potentially profit from your trade.

About Admiral Markets

We are a broker with a global presence and are authorized and regulated by financial regulators such as the Financial Conduct Authority (FCA), the Cyprus Securities and Exchange Commission (CySEC) and the Australian Securities and Investments Commission (ASIC).

We provide access to over 8,000 financial trading instruments such as Forex & CFDs on stocks, indices, bonds, commodities, ETFs and cryptocurrencies, as well as investment opportunities in real stocks and ETFs.

With Admiral Markets you can use the most innovative trading platforms such as MetaTrader 4 and MetaTrader 5 for free, as well as the exclusive MetaTrader Supreme Edition plug-in.

Download MetaTrader Supreme Edition today for free by clicking on the banner below:

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