Author: Shams ul Zoha
How to trade Seasonal Patterns
The price movements on a chart depict the combined activity of millions of traders. As market participants are humans, any repeating change in human behavior daily, weekly, and monthly leads to seasonal patterns. Within such a period, the instruments behave similarly to other assets. They may also show repetitive behaviors in their price actions. From a trading perspective, traders look out for these moments to get good setups and increase their probability of winning. A perfect entry is possible only after the identification of such trades beforehand. Our article will discuss the crucial factors an investor should look for when trading seasonal patterns.
Important factors to consider
By considering a few crucial factors, it is possible to trade seasonal patterns with good consistency.
Various online websites help record the activity of seasonal trading patterns with ease. For example, as the world's major trading currency is the United States dollar, you can use the USD index to find out how the greenback performs during each month or season.
Image 1: Euro futures chart against the United States dollar for a seasonal period of 20 years. Source: Moore Research center
On the line chart above, you can see the repetitive pattern of the Euro. The currency trades at its lowest during the ending months of February, June, and mid-November. The peaks are seen in May, ending October, and end of the year. By following the relative highs and lows, a trader can confirm his strategy with the market and look for trades in the same direction through forex seasonality.
Leading indicators such as stochastic and RSI can also be indicative of a seasonal pattern. The overbought and oversold conditions in the algorithms may rhyme with our chart in image 1. Be careful of the lagging indicators as they are not proficient in predicting the future state; instead they are focused on the current trend.
Image 2: In March 2019, the RSI hit a low value that was close to the 30 mark. In 2020 we saw the same pattern repeating itself, indicating that the market was shifting towards a seasonal shift in prices.
Image 3: In March 2021, we saw another bottom. By combining several indicators, we can create multiple confirmations to enter our trade with more probability. In this case, it is possible to incorporate this analysis with our Euro chart in image 1.
Use of macroeconomic factors.
Macroeconomic factors can dictate the market for an extended period, thus creating a seasonal pattern. Any currency or financial instrument can see depreciation or appreciation when there is a substantial economic release or increasing exports due to a specific season. As an example, consider a company that sells cold drinks. The demand would be greater during summer, where the high consumption leads to more sales, thus driving the stock higher.
Example of an intraday seasonal pattern
We have to take a peek at the average pip movement for a pair during various sessions for intraday trading. Doing so will help us put recognizable stop loss and take profit targets. You can also look at the intraday average chart indicating the time at which the instrument hits the top or the bottom.
Image 4: The 10-year EUR/USD intraday seasonality forex shows that the pair typically reaches the bottom right before the New York sessions. Using these statistics, a trader would want to avoid selling at this point. Source: Tradingstrategyguides
Do seasonal trading patterns offer guaranteed wins?
The financial industries are a game of probability where the strategies allow us to gain a definite edge over the markets. This strategy works as the seasons or market patterns have a formula of repeating their movements. While seasonal patterns have a good chance of winning, there is still a margin of failure that an investor must not overlook. Through proper risk management and psychology, a novice trader can learn seasonal strategies with ease.
Where can you trade seasonal patterns?
You can trade seasonal patterns through any exchange. Opening a trading account and depositing cash is relatively easy and should be of little concern. Getting a good charting platform that shows a deep analysis of proper seasonal patterns is the priority. Joining communities following the same strategy will help your cause. Several financial websites regularly offer updates on all repeating events. Make sure to keep an eye on them.
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