Including seasonal cycles into your trading might be the final step you need to take to become successful.
Here is everything you need to know about seasonal cycles.
What are seasonal cycles?
Even though you might not be consciously aware of it, you already know some effects the calendar has on the market: From November to March, when winter keeps the northern hemisphere cold and the overwhelming majority of all people on this planet too, what will happen to the price for heating oil? Of course, demand will rise during this time, which will cause prices to rise, too. Come summer time, demand will recede and prices will fall.
Of course, the demand and supply created through financial markets will distort the season cycle a little, but depending on the season you know which direction the market is more likely to take. This can be a very valuable information that can help you increase the percentage of winning trades significantly.
Weirdly enough, natural resources are not the only assets that experience seasonal cycles. Equities and futures go through the same kind of cycles. While these cycles are not as obvious as the cycles in heating oil, they are significant enough to benefit your trading if you know and understand them.
As Yale and Jeffrey Hirsch found out, almost all of the gains in the S&P 500 came between the beginning of November and the end of April. For long term investors, they therefore concluded that they can make the most money when they invest in November and sell in April. This simple principle combined with a MACD to find the best entry point would have multiplied your money 150 times from 1952 and to 2009.
There a number of other seemingly random rules that hold a surprising accuracy:
- If the S&P rises in January, it will end the year higher than it started it. Accuracy: 90 percent.
- If the U.S. president enters the third year of his term, the market usually goes up. Accuracy: The only time the market fell significantly during the third year of a president’s term was in 1931.
- The last two years of a U.S. president’s term create higher gains than the first two years. In the first two years bear markets held the Dow Jones to a total profit of only 262 percent since 1833, while bull markets pushed the second two years to total profit of 719 percent.
To discover seasonal effects on stocks, you can use special websites that were designed to track these kind of cycles. The most famous of them, Thomson Financial, allows you to analyze any stock for its monthly performance since 1986. This way, you can find in which months a stock is usually on the rise and in which months it will fall.
To some extend seasonal cycles have become a self-fulfilling prophecy. Since so many traders are aware of them, they influence many trading decisions and therefore reinforce already existing cycles, which makes them only more important to your trading.
How to trade seasonal cycles with binary options
While seasonal cycles take too long to develop to be traded with binary options directly, they can greatly help your predict the future market direction on a shorter timescale. If you know, for example, that there is a general bullish expectation for your asset based on the time of year, you can look for bullish signals to confirm this expectation.
Some traders even make it a rule to only trade an asset in the direction its seasonal cycle predicts. They assume that this rule will increase their percentage of winning trades and therefore increase their profits. If you find a seasonal rule for the asset you are trading, you can apply a similar rule and make your own trading more successful.