Seasonality occurs within many aspects of our lives. The changing of the seasons is but just one simple example. While these seasonal changes can and do exhibit tremendous influence on our lives, if we are aware of it, we can easily anticipate and prepare. For example, buying winter clothing during the fall season in preparation for the arrival of winter would be a very simplistic example of a type of seasonal anticipation.
Just as we apply simple forms of seasonal analysis within various areas of our daily lives to prepare for future outcomes, we can apply seasonal analysis and indicators to the commodity markets to prepare for potential trends within the marketplace. While many factors can influence market prices, many traded commodity futures contracts are affected by regular growing conditions and weather. For example, following harvest, when crops are large, a reasonable assumption would be that prices are low due to commercial selling.
Seasonal analysis is a type of leading indicator. Most technical based indicators can be placed into one of the following types of classifications:
* Leading (Seasonal, Cyclical)
* Time Current/Coincident – (Market Sentiment, COT)
* Lagging (Moving Averages, Oscillators)
Most speculators typically utilize various types of indicators to arrive at trading conclusions. Usually, this is done for the purpose of having multiple technical confirmations, which for the most part, will normally increase profitability and reduce losing trades. However, many traders, especially those who are relatively new to trading, will apply this multi-indicator approach only to defeat their endeavors by essentially using analytical studies that are fall into the same type of classification but don’t truly provide indicator diversification. For example, applying non-displaced moving averages in conjunction with the RSI and Stochastics. All of these indicators fall into the lagging category like most of the “popular” indicators usually do. When utilizing technical indicators in our market analysis we want to select studies from all three of the classification types. At that point we can achieve superior analysis through proper technical indicator diversification.
Some individuals may find comfort initiating trades based solely on a given seasonal tendency of market trends, however, I greatly advise against that. I recommend, at the very least, confirming any given seasonal tendency identified with the Seasonal Commodity Futures Strategy Grid with other types of indicator(s). Ideally, you may want to select one or more indicators from both the time current and/or lagging indicator groups.
Lastly, one item to keep in mind when applying the Seasonal Commodity Futures Trading Strategy Grid is that commodity future markets are fractionally symmetrical or simply put there are smaller waves with larger ones.
So you want to be aware of the various long, intermediate, and short-term trends operating within a given market. For example, many times, when the long-term movement, as defined by a trend indicator applied to a monthly chart, is positive, prices of a commodity futures market will consolidate within a given trading range at an intermediate-term bearish seasonal tendency. Typically, this trading range will last until a bullish time frame arrives which, at that point in time, the market will break out and continue in the direction of its long-term trend.
By Paul Skarp
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