How Seasonality Affects Commodities

Seasonal analysis is a useful tool

If you are looking to increase your odds of success, seasonal analysis can certainly be helpful. For many decades, seasonality has been a major force in the markets, and will continue to be. Whether you are trading commodities or stocks, implementing seasonal pattern analysis into your overall trading plan, will improve your trading results. All trading is based on probabilities. You want to put as many factors in your favor as possible, before taking a position in the market trends for all seasons.

A definition of seasonality

Many people might have a general idea of what the meaning of seasonality is. I think it would be beneficial to have a good working definition. A seasonal price tendency is the inclination for a certain market to move in a given direction, at specific times of the year. This should help clear up any misconceptions concerning what seasonality means.

Grain markets offer consistent seasonal patterns

When it comes to commodities, grain markets such as corn, soybeans, and wheat, have the most consistent seasonal patterns to work with. There are specific fundamental reasons why these markets move in a similar direction, during certain periods of the year. Seasonal price tendencies are found in nearly all commodities, and in the stock market as well. This means seasonality should be part of your overall analysis, in most trading situations.

Do not trade based only on seasonal tendencies

Sometimes new market participants start trading commodities using a system based totally on seasonal patterns. This is a big mistake. You can see ads that claim a certain commodity will move higher 90% of the time, during a specific 2 or 3 week period every year. This may sound really good, but statistics like this mean nothing, if the market is trending strongly in the opposite direction. You will most likely lose big time. Always do a complete analysis, before taking a position in any market. What is the trend? How does the chart pattern look? Check the cash basis. Historically, what is the price level at? Mix these factors in with seasonal tendencies analysis. If they all line up, you have a great trading opportunity.

Use chart patterns and seasonality as a powerful combination

An excellent trading strategy is to watch down trending markets as they move into their normal, seasonal low time period. If there is a reversal of trend on the daily chart during this time frame, you have a good set-up for a trade.

Soybeans tend to form a seasonal price bottom in october

One of the most reliable seasonal tendencies, is soybeans hitting a low price for the year in October. A lot of farmers will sell their soybean crop, right out of the fields at harvest time. This tends to create enormous selling pressure, which normally gives us this bottoming tendency. Once the harvest selling pressure subsides, soybean prices tend to exhibit a post-harvest rally. This will usually offer you a profitable trading opportunity. It is important never to guess. Only take action once you get a chart signal to confirm the seasonal tendency is working this year. The proper use of seasonality can help you make a lot of money trading commodities.

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