Seasonal Stock Trading

Posted on October 15, 2010 by StockTrading.net | Comments Off

Many traders have discovered the profitability of seasonal stock trading – that’s the process of watching trends in stocks based on the season.  With the right research and strategy in place, stock trading based on seasonal tendencies can be extremely profitable.  For example, if you look at the S&P charts over a period of 20 years or so, you’ll notice that overall the S&P goes up between March and May, then drops from June to October, then moves up again from October to December.  This tendency is so predictable that it resulted in a saying among stock traders: “sell in May then walk away!”

Had you followed this seasonal stock trading with shares of SPY between January 2000 and December 2009, buying 100 shares on February 26th and selling on June 4th and buying 100 shares again on October 26th and selling on December 29th, your winning percentage would have been 13 trades out of 20 – or 65%.

Seasonal stock trading is also referred to as “stock market cycles”; but seasonal trading is monitored based on calendar dates.  If you were to chart the results of the market over any different unit of time, you’ll probably note various seasonal tendencies that repeat year after year for that same time frame.

Some years, seasonal stock traders perform better than others, as it’s not an exact science.  In the years you are wrong, you can really take a hit to your profitability so you’ll want to also employ some risk management techniques when you are basing your trades around seasonal tendencies in the market.

Two Types of Seasonal Stock Trading

Most people advocate one of the two main types of seasonal stock trading:

1)            Using computer software to back test a number of individual stocks.  The software can check all possible scenarios for buying and selling dates to determine whether the dates chosen would have resulted in a profit or loss.  You can test out different seasonal time frames over several years to see whether there is a seasonal tendency to profit during certain times of the year.

2)            Think about how seasons affect certain crops – like fruits and vegetables – and choose stocks that you can predict tendencies based on seasons, that normally repeat year after year.

Seasonal stock trading tips:

  • Review seasonal charges for ten years at a time to find patterns and seasonal tendencies
  • Use other timing indicators with seasonal trades to increase the chances of trading at the right time
  • Determine in a twelve month period, where the low period is during the year and where the high period is during the year – then buy on the low and sell at the high point.  Historically, your analysis shows this would be a profitable move.
  • Keep an eye on holiday seasonals as the market seems to change predictably around major US holidays each year.

Photo via joiseyshowaa

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