Market Seasonality Patterns (Profit Like Professional Traders)

Market seasonality, also called calendar effect are strategies that you buy or sell certain securities at a fixed date of every year, and close the position at another fixed date. These strategies have been applied to both equity and commodity markets.

One of the most famous seasonal trades in equities is called the January effect. There are a lot of different approaches to this seasonality. One of them is that small-cap stocks that had the worst returns in the previous calendar year will have higher returns in January than small-cap stocks that had the best returns.

The idea behind this pattern is that investors like to sell their losers in December.

Why is that you may ask? Easy asnwer. Benefits from tax losses. This approach creates additional downward pressure on their prices. One thing leads to another and when this pressure disappeared in January, the prices recovered somehow. This is a typical mean-reverting strategy, mixed with seasonality.

The most common bad habit I have seen in traders – good and bad ones – is the inability to react correctly to market action. - Larry Williams

Famous seasonality traders

A lot of the famous traders used the market seasonality to build their wealth in the recent past.

Larry Williams

One of them is Larry Williams for example. You know that we’ve talked before about his 10 000% return for a single year and his money management strategies. What we did not mention in our previous videos is that market seasonality was one of his key points for these extraordinary returns.

He is famous for finding the best day of the week to buy and the best day of the week to sell. In his book “Long-Term Secrets to Short-Term Trading”, he describes a strategy that buys S&P500 every Monday and sells it at the end of the day.

In the same book, Larry does two backtests, one from 1984 to 1998 and one from 1998 to 2011, so that we can see that the pattern is still there after all these years. So let’s start with the first set of data.

We can see that the worst day to trade S&P500 is Thursday with 404 trades with a win percentage of 50.99%, an average win of $615, and an average loss of -$767.

Profit to loss ratio is 0.80. The average trade would be in a loss of -$62. The maximum loss is $4 675 and if you have traded this strategy for this period you would have lost - $25 000. You would be devastated, right? At least I would be

On the other hand, the best day to trade S&P500 is Monday. If you traded this strategy from 1984 to 1998 you would have gained $66 813, which is a lot better than trading Thursday’s. With trading Monday’s you would have

• 385 trades for this period
• 60% win rate
• $723 average win per trade
• -$650 average loss
• profit to loss ratio 1.11
• average trade $174 and maximum loss of $3 450

With our second set of data in the same book, we can see that the pattern is still there, even all these years. Again if we have traded this strategy for the period 1998 - 2011 every Monday, we would have gained $102 925, pretty cool, right?

One more time, the worst day of trading the S&P500 is Thursday where if you have traded for the same period you would have lost -$14 100. By the way, You can buy the book from amazon. It’s one of my favorites.

Martin Schwartz

Martin Schwartz is another example of a super performer using market seasonality. Schwartz, a former Marine Corps Captain, is a Wall Street stock trader, who made fortune during his carrier. He also gained popularity when he won the US Investing Championship in 1984.

He is also famous for turning a $40 000 account into over $20 million without realizing a drawdown of more than 3% in every single month.

One of the tools that Schwartz uses is the historical performance of a given calendar period. He regularly refers to the trader’s Almanac, which provides data on the distribution of returns. Schwartz also digs deeper by looking at returns for specific days of the year and again these stats are included in “Stocks Almanac”.

We are going to present a little bit more about “Stock Almanac” a little bit later in this post.

Also the YouTube channel Financial Wisdom made a great video review of Schwartz’s book called “PIT BULL”. I highly recommend watching that video as well. It gives all of the tools that Martin Schwartz used to gain his fortune. I will leave a link to the video in the description below

Something that you have to have in mind is that the seasonality pattern is not a signal by itself. You have to have some kind of confirmation to see if this seasonality is going to happen or not. What seasonality does for you is that it gives an advantage when you want to execute your trade based on your strategy.

Have in mind that seasonality works best in commodity trading. That is because seasonal demand for certain commodities is driven by “real” economic need rather than speculations.

Resources for seasonality patterns

There are a lot of different seasonality’s and strategies around it. Let me present you with some inside information about how you can find your seasonality and exploit it.

Seasonax

One of the websites that I want to share with you is Seasonax. It has a limited free version and paid version, which gives you a huge amount of seasonality patterns.

Unfortunately in this website, you can find only monthly patterns. Also in the application, you can find information like “Annualized return”, “Win Percentage Rate” and history for every year that your pattern accrued. You can test out currencies, commodities, stocks, indexes, and even crypto (with a paid version of course).

Stocks Almanac

Another application that you can use, but it’s paid, is Stocks Almanac. If you subscribe to them you will receive “Successful Short- & Long-term Trading strategies”, “Profitable ETF & Stock Trading Ideas with specific buy & sell price limits” and more. They even have history on their returns through the years and they look promising.

Seasonal Charts

Let me present you with one more application, which is free and can help you find your seasonality pattern. The website that I am talking about is seasonalcharts.com. They are powered by “Seasonax”, but they have a little more information like “Weekly Patterns” and even “Daily Patterns”.

You can find a chart for currencies, indexes, and commodities. Everything on the website is well organized and easy to read. If you want to build a strategy based on seasonality I can recommend you to start from here.

Stock Charts

And the last application that I want to present to you is stockcharts.com.

In this website, there are a lot of different features, but what we need from it is the seasonality charts. There you can see that you can select a symbol and after that, you can search for market seasonality pattern for that symbol for 20 years back. What the graph will show you is the percentage of a month which closed higher than it opened.