Certus Trading Review: The Forgotten Pattern?
As a technical trader, I spend a good amount of time looking for repetitive patterns that re-occur over and over and over again. With the help of data-crunching software, anyone can easily write a few scripts and perform their own analysis to find highly repetitive setups.
When it comes to repetitive patterns, we often talk about chart patterns such as breakout confirmation, bullish and bearish reversal pivots, and continuation patterns that occur frequently with a high degree of accuracy. However, we often overlook ONE type of highly repetitive pattern that occurs every year.
This pattern is very easy to trade.
It is not s-e-x-y, which is why I consider it “The Forgotten Pattern”, but it works!
~Seasonality Patterns~
Seasonality is simply a period of time when an asset (i.e., stock) tends to move in the same direction every year. That’s it! So, if XYZ stock moved up from November 2 to November 22 over 17 of the past 20 years, the assumption is that it is also likely to move up this year as well.
Simple.
Let’s look at a real stock example:
Snap-on Incorporated (SNA) is a designer, manufacturer and marketer of high-end tools and equipment for professional use in the transportation industry including the automotive, heavy duty, equipment, marine, aviation, and railroad industries. The company has been around since 1920 and has a rich history across the world.
Over the past 22 years, since 1995, if you bought SNA stocks on October 11 and sold on November 13, you would have made money 18 out of the 22 years with an average NET return of 7% during this period. That’s buying the stock outright. If you use an appropriate options strategy, the return could be 10X that.
Forget the past … so what happened this year in 2017? Well, on October 11, SNA opened at 150.20. Then, on November 13, it closed at 156.07. A 5.87 gain or 3.9% return if you bought the stock outright. Using a simple options strategy can easily 5X to 10X the return with limited risk.
Don’t take my word for it. Look at the SNA chart since 1995 between October 11 and November 13 and see it for yourself.
WHY? Why do seasonality patterns exist in the markets? Well, one explanation is that large institutions often have a “schedule” to accumulate and distribute stocks for their portfolios. These institutions can be banks, hedge funds, pension funds or large investors – they buy and sell many different stocks and their managers try to buy ahead of good fundamental data releases, and sell ahead of seasonal downturns. Simple strategy, but it works.
Looking ahead to December – here is a seasonality pattern for you to ponder. Over the past 33 years, between December 14 and December 29, Deere & Company (DE) has traded up 27 of those years or 82%. The average NET return is 4% each year over the past 33 years. Over the past 33 years, the markets have experienced both up swings and crashes.
Knowing these facts, will you consider trading this setup? If so, how?
Matt Choi CMT
Co-Author: The Winning Way
Certus Trading Review: The Forgotten Pattern?
worthwhile approach that gets overlooked often times … even if a strategy isnt sexy, if it delivers some return on investment in a consistent basis, its definitely worth my time.
I like what Matt is saying here and I actually used this strategy in my own trading. Seasonality trading brings a new dimension to analyzing the market. The majority of traders use technical analysis, but this can also play a big role in how certain FX pairs may behave.
trading using seasonality patterns makes sense…such a simple rule to increase your profit probability.
Agreed! Seasonal trends IMO are much stronger and reliable than other methods.
Fundamental factors occur every year, and even though seasonality patterns aren’t foolproof, I still think you can make them work for you.