Everything You Need to Know about Seasonal Stock Trading

 

Many traders have discovered the profitability of seasonal stock trading, or analyzing and trading stocks based on seasonality. With the right research and strategy in place, stock trading seasonally can be extremely profitable. 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!”

If you followed this seasonal stock trading trend 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 percent.

Seasonal stock trading is also referred to as “stock market cycles,” but 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 in that same time frame.

It’s not an exact science. Some years, some seasonal stock traders perform better than others. In the years you’re wrong, your profitability can really take a hit, so you’ll want to also employ some risk management techniques when you’re 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 might result in a profit or loss. You can test out different seasonal time frames over several years to see whether there is a seasonal tendency.

2. Think about how seasons affect certain crops – like fruits and vegetables – and trade stocks that follow agricultural seasonality. These patterns tend to repeat year after year.

Seasonal Stock Trading Tips

  • Review seasonal changes 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 when high and low periods occur within a 12-month period. Buy on the low and sell at the high point, optimizing your profits.
  • Keep an eye on holiday seasons, as the market seems to change predictably around major U.S. holidays each year.