A big part of a successful trading strategy is seasonal trading. As we are about to see, this is especially true in commodities.
Today we will look at a seasonal trading strategy for silver where we invest only in the best-performing months. Since 2001, it has outperformed buy and hold by more than 4% annually.
We will start by looking at what seasonal trading is, the historical average monthly performance of silver, why there is seasonality in silver, and backtesting a silver trading strategy.
What is seasonality in trading?
In trading, seasonality refers to regular price patterns at a particular time of the year, month, week, day, or hour. This can happen because of business cycles, news, or holidays, among other reasons.
For example, one of the most known seasonalities in the stock market is to sell in May and go away. It consists of buying the SPY at the beginning of October and selling it at the end of April. And it works surprisingly well.
Let’s look at the monthly average performance per month for silver:
As we can see, its price typically rises rapidly at the beginning of the year. By contrast, in the remaining time of the year, its price patterns are rather muted from a seasonal perspective.
January and July are the best months to be long silver. The first is positive 69.5% of the time, while the latter is only profitable 63.6%.
On the other hand, June and September are the worst months to hold silver. June is only positive 31.8% of the time, while September is 54.4%.
Why is there seasonality in silver?
Commodities are among the most seasonal assets in the market. They are highly dependent on the weather and business cycle.
For example, heating oil tends to be cheaper in the summer than during the heating season in winter, and wheat is typically more expensive before the harvest than after that. Precious metals, including silver, are no different.
The main reason that might explain this seasonality in silver is that it’s caused by numerous industrial silver users that place their orders for the metal at the beginning of the new year. If you think about it, it is understandable that this happens, as in business practice, annual planning is often shaped by the financial year. However, it is not entirely rational if they want to buy at the most reasonable prices.
Unlike businesses that need silver to produce goods, traders can take advantage of this seasonality by being long silver the best months of the year and avoiding it the rest of the time.
Seasonal trading strategy for silver – backtest and performance
As we can see from the chart above, there are two periods in the year where silver performs best: December to February and July to August. Having this in mind, the strategy is pretty simple:
- We go long silver at the beginning of December and sell in February.
- We repurchase it on the first day of July and sell it in August.
We backtested this strategy going back to 2001. Here is the equity curve:
The equity curve looks excellent! Here are the trading statistics and performance metrics:
- CAGR/annual return is 11.34% (buy and hold 7.44%)
- Time spent in the market is 42.1%
- Maximum monthly drawdown is -23.34% (-71.65%)
- Risk-adjusted return is 26.93% (the return divided by time spent in the market – 11.34/0.421 )
The strategy holds silver in 5 out of the 12 months and returns an extra 3.9% per year or a risk-adjusted return of 26.93% vs 7.33% for buy and hold. Even better, the maximum drawdown is reduced dramatically from -71.65% to -23.34%.
Seasonal trading strategy for silver – conclusion
To sum up, the seasonality pattern of silver is solid. Commodities are very seasonal and cyclical, so trading silver based on this system might make sense.
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