All about investment

By Bryan Moffitt

Many traders in the futures markets use either technical analysis (charts and indicators) or fundamental analysis (supply/demand figures, news, etc), or a combination of both.

In order to trade successfully, it is important to put the odds in your favour as much as possible, given that for the most part trading is a game of probabilities. Seasonal analysis can be the tool that does just that. Regardless of your current trading method, including seasonal research in your program will increase your odds of success.

Many of the futures markets, especially the hard commodities such as the agriculturals, metals, and energies, exhibit a regularly recurring seasonal pattern in price each year. This is because the supply and demand for these commodities generally peaks and falls at similar times each year, due to either the production or demand cycle.

An example is the wheat market. Winter wheat is planted each fall, goes dormant over the winter, matures in the spring, and is generally harvested between May and July. That means that supply is greatest in May-July, and declines throughout the year. Price generally tends to fall into the harvest as new supply comes online, and then works its way higher over the rest of the year as the current crop year supply is consumed. While this is a broad analysis, a more detailed analysis will highlight different periods within the trading year where price moves are most reliable, based on historical performance. An example would be analysis showing that the March Wheat contract has fallen in price in 24 of the previous 30 years between November 30 and February 25.

Most other commodities exhibit similar seasonal patterns based on their own production and demand cycles.

A complete seasonal and historical analysis can allow you to determine:

- periods of reliable trending in any given futures market

- the past success rate for any proposed trade

- the average and worst loss for a proposed trade

- the average and greatest profit for a proposed trade

- how closely this year's market is following its normal seasonal pattern

In order to ensure that a pattern is a true seasonal and not just a random chance pattern, it is best to use as many years as possible in your analysis. A good seasonal analysis will use at least 15 years of history, although some believe that 30 years are required to confirm a seasonal pattern.

Some traders will trade on seasonals alone, but most incorporate them into their own trading program. A good seasonal analysis will tell you the historical probability of any trade being successful. Adding that to your own trading system can be a powerful tool, keeping you out of potentially losing trades, and allowing you to feel more confident when you enter what are hopefully successful trades.

Seasonal and historical studies can also allow you to more accurately determine risk, as well as profit targets, all based on past performance. As they say, past performance does not guarantee future success, but it can certainly act as a good guide.

Bottom line is that seasonal analysis is a valuable tool that every serious trader should add to their trading tool arsenal. Having as much information as possible before entering a trade is the way to increase your odds of success in the markets.

Bryan Moffitt is the owner of Futures Research Corp. - a company that provides traders with valuable analysis and research to improve their trading success in the futures markets.

http://www.FuturesResearchCorp.com

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