How can i benefit from Seasonality?
by SMO Team
For investors and Traders
In a nutshell. Seasonality improves timing for entries and exits in stocks, ETFs, currencies and commodities!
Seasonality is one of the five most important influencing factors in the stock market.
Our motto "For constant success you need an edge." means that various advantages are combined in an investment or trading process.
Seasonality is a key advantage, which has been proven in numerous studies. For an overview of studies on seasonality, see our article "What is Seasonality? How does it work.".
How can investors and traders benefit from seasonality?
It is always a challenge for investors and traders to estimate the stock market. There are numerous influencing factors to consider. Seasonality is one of the important influencing factors.
Let's look at how to profit from seasonality as an investor or as a trader.
For investors
As an investor, fundamental development is crucial.
But even if the fundamental development is positive, the development of share prices is usually much more volatile than one would usually like.
The following image shows seasonally optimized investing in the S&P500.
This analysis shows that the S&P500 performs worse in the summer months than in the other months. This effect has little to do with the fundamental development of the companies and is based on other factors such as lower liquidity.
Seasonality Analyzer: S&P 500 ETF (SPY)
Let's take a other example. Undeniably, Walt Disney has been a fundamentally successful company in the past and will probably remain so in the future.
But in the seasonal analysis it can be seen that the average annual performance is very cyclical and subject to strong fluctuations.
If one had reduced the position in DIS in the seasonally weak phases and increased it in the seasonally strong phases, the portfolio performance would have been much better.
Seasonality Analyzer: WALT DISNEY COMPANY (DIS)
As an investor you can increase or decrease the position size of your shares if the company is in front of a seasonal trend start or trend end. Seasonality optimizes the investment process.
For traders
As a trader, complete trading strategies are built on a seasonal basis. And seasonality can of course be combined with other strategies.
Let's look at an example.
If you look at the seasonal price trend of Microsoft, you will quickly find a strong seasonal trend in the period from October 10 to November 10. The following picture shows the key figures if one had always bought the Microsoft share in this period in the last years. In the lower part of the picture you can see the performance of the individual years.
You can also view the MSFT analysis directly in our "Saesonality Analyzer".
Extremely interesting for traders: There are numerous seasonal trends that have a hit rate of over 90% over 20 years.
Most seasonal trades last between 3-6 weeks.
If you run several seasonality trades in parallel and can implement this process several times over a year, this results in a very good risk-reward ratio.
How to find seasonal trends?
One of the reasons why seasonality is mostly only used by institutional market participants is that you need the appropriate software to do it.
We offer you a two component solution. Our Seasonality Screener and our Seasonality Analyzer together are the perfect combination to find and analyze seasonal trends.
How our seasonal algorithm works.
The Seasonality Screener makes it possible to find profitable opportunities with just a few clicks. New results are displayed every day.
For each instrument the algorithm calculates over 5000 different seasonal trends. With over 10000 instruments, that's a total of over 50 million different scenarios in our database. The Seasonality Screener shows only the best trends. With numerous filter options, you can further customize the result to your needs.
The seasonal analysis allows a detailed look and comparison on the plant instruments. The Seasonality Analyzer allows the temporal analysis with periods for "days in a year", "days in a month" and "days in a week".
Summary
As a summary. Seasonality can optimize the timing of investing and trading.
As an investor you can increase or decrease the position size of your shares if the company is in front of a seasonal trend start or trend end. Our example of seasonal investing in the S&P 500 shows the possibilities.
For Traders, Seasonality is a good trading strategy or it can be included as an additional factor in other trading strategies. If you run several seasonality trades in parallel and can implement this process several times over a year, this results in a very good risk-reward ratio.
Here is a small overview of the benefits.
Seasonality can be used in many areas:
- Optimize your asset allocation. Which asset class has strong and weak months?
- Optimize the entry and exit timing of your investment and equity positions.
- Optimize your money management: Adjust the position size of individual portfolio values based on seasonal trends.
- Optimize your trading. An important trading rule is not to trade against the seasonal trend.
- Find trades with our Seasonality Screener. Develop your own strategies with our Seasonality Analyzer.