30 Best Seasonality Trading Strategies

30 Best Seasonality Trading Strategies 2024

Seasonal changes and Seasonality trading strategies play a big role in financial markets and can really affect how much money traders make. When traders spot patterns that happen regularly, they can make smarter trades and maybe earn more money than if they followed basic strategies. Whether it’s stocks or goods like oil or gold, seasons affect lots of different things in the market, and knowing about these patterns can help traders decide the best times to buy or sell.

This article looks at why you should use seasonality trading strategies (calender based strategies). We explain what seasonality trading is, why seasonalities happen, and at the end, we give a long list of Seasonal Trading Strategies in stocks and how to use them.

Seasonal trading strategies

The year has four different seasons and the financial markets have seasonal patterns that you can be made into seasonal trading strategies. Seasonal trading refers to seasonal patterns that occur at regular intervals in certain time frames. Let’s call them seasonal trading strategies for simplicity.

If you are looking for a trading edge in the markets we believe seasonalities can offer you some strong and long-lasting edges. Many of them can’t be used on their own, but together with other parameters, seasonalities are a great trading tool.

Here you can find all our seasonlity trading strategies. (50-100 articles).

What is seasonality in trading?

Seasonality in Trading Ride the Waves

Seasonality in trading refers to patterns that occur at regular intervals in certain time frames. The study of time series data in many different assets shows that each asset has its own peculiarities or seasonalities from time to time. Perhaps the best well-known seasonality was the January Effect in stocks: stocks tended to rise in January (the effect seems weak lately).

Does a seasonal trading pattern happen with a certain regularity?

No, a seasonal pattern doesn’t happen with 100% regularity. We are talking about statistics and averages.

The averages might indicate stronger performance during the winter than in the summer, for example, thus we have a seasonal trading pattern. It doesn’t mean we witness positive returns every winter, though. Even though a seasonal trading pattern can have a very positive average, it could be the result of outliers. If you have few observations to back the seasonality even 2-3 observations can explain most of the results. The win ratio in trading is important.

No seasonal trading pattern lasts forever. The above-mentioned January Effect was one of the most useful seasonalities until it stopped working. Stocks performed very well during the month of January for many decades until the 2000s. This pattern has dissipated over the last two decades.

An example of seasonality in gold

As an example, we can look at how gold has shown strong performance in January and August since 2006. The table below shows each month’s performance for GLD (the ETF that tracks the gold price):

Seasonal trading strategy

Intraday seasonality in stocks

Another example of seasonality is the intraday movement in stocks. We can break down the trading day into three separate sessions: the opening session (1 hour), the midday session (many hours), and the closing session 30 mins to one hour). The volatility is different from each session: the midday session is calm while the two others have much more action.

Why use seasonalities in trading strategies?

The main reason for using seasonalities is that we believe most of the anomalies you find in your backtests are camouflaged seasonalities. For example, the Turnaround Tuesday is mostly a result of a seasonality – not an anomaly. Where you see correlation in trading, it might just be a hidden seasonality.

Another reason for using seasonalities in trading is that they can be very valuable inputs into strategies by combining other parameters.

We use seasonalities extensively in our research and live trading, at least in our stock trading. We trade many seasonal trading strategies. The reason is simple: we believe most of the edges are structural and thus more likely to last year after year. For example, the turn of the month trading strategy is most likely a result of behavioral patterns, this we like to refer to it as a structural trading edge.

Drawbacks with seasonal trading strategies

One drawback with many seasonal trading strategies is the number of observations or the lack of observations. Noise and randomness are lurking at every corner in the financial markets, and you must be careful to conclude prematurely. An annual pattern obviously happens just once a year, and hence you need 30 years just to get 30 observations. This doesn’t hold up in any statistical test.

A general rule in trading is to have as many observations as possible. The very successful Medallion Fund only trades short-term patterns because they want a huge sample of observations. Keep this in mind when you are backtesting!

Another drawback is that markets are non-stationary. Nothing lasts forever. The same applies to seasonalities and thus you have to make up for losses in seasonalities that stop working.

Why do seasonalities in trading happen?

We’ll briefly explain why seasonalities happen, although many are hard to explain. Jim Simons’ Medallion Fund is careful to ask why too frequently because the market consists of an unlimited number of causes and correlations and is thus extremely complex to understand. Here is the reasons seasonalities happens:

1) Seasonalities in trading happen because of order flows

Let’s get back to the three daily sessions in the stock market: the open, the midday session, and the close. Why are the opening and closing sessions more volatile than the midday session? That is most likely because a larger portion of the order flow is happening around the opening and closing sessions.

Moreover, overnight news needs to be discounted and this might lead to further volatility for the opening session. We believe this is a structural seasonality and more likely to stand the test of time.

2) Seasonalities in trading due to weekdays, holidays, and news

We see the same seasonal tendencies on Mondays which are more volatile than other days. Our hypothesis is that investors discount news after the weekend.

Thus, there is a structural reason why we see more volatility around the open and the beginning of the week.

3) Regulatory and legal seasonal trading strategies

Many of the best edges in the market happen because of regulatory or legal implications.

Laws and regulations are legislated on an ongoing basis, and this has a lot of both wanted and unintended consequences. For example, when lawmakers make it difficult to sell stocks you can be sure there are loopholes to exploit. If many are not able to short, it might be easier for those who can.

Up until 2010 a lot of the trading in stocks went via the specialist on the NYSE (for NYSE stocks, obviously). This created a huge edge around the open and the close where you could get huge price improvement on order fills. This is (was) a regulatory seasonality.

4) Weather seasonalities in commodity trading strategies

When something is labeled as seasonalities we associate this with weather and climate. And for commodities, this might have huge impacts.

The commodity market, which is highly dependant on the weather, has many seasonalities. In the links below you can find some examples in three of them:

5) News seasonalities

The Friday Jobs Report is published on the first Friday of each month. This creates huge volatility in both bonds and stocks and has proved to be a very positive day for stocks over the last 30 years.

6) Overnight seasonal trading strategies

Practically all the gains in the S&P 500 over the last 30 years have come overnight from the close of the session until the open the next day.  The S&P’s 10% annual return since 1993, including dividend reinvestment, has come from owning it overnight, and the day session from the open to the close has contributed almost nothing. This is an extremely strong seasonality!

We see the same pattern in gold miners (GDX): a strong drift upward overnight, while the day session is negative. Read more here about these patterns and how you can exploit them.

Calendar-Based Strategies

Here you can find all our calender based strategies. (50-100 articles)

We have already mentioned in this article many seasonalities in stocks: the overnight edge and the increased volatility trading strategy during the open and the close.

We trade mostly stocks and related indices. One reason for that is the many seasonalities you can find in both the broad indices and in subsectors.

For example, oil and oil stocks perform better in the first half of the year while many healthcare stocks have their best period during the summer when the overall market is weak.

There are many more Calendar-Based Strategies. This article contains just a few of the seasonalities we have covered and there are many more to come (please register your e-mail in the right upper corner to get updates):

You can find many more among our free trading strategies.

Retail Stock Market Seasonality – example

Let’s look at an example of a seasonality:

Just like we can develop seasonal trading strategies in the overall stock market, we can find potentially profitable seasonal trading strategies in the retail sector. This section presents one such example.

Seasonalities in retail stocks

Some years ago, Jay Kaeppel published an article about retail seasonalities. The best months for retailers are November, March, and February. Is this a possible seasonal trading strategy?

We did the same test as Kaeppel by using the Fidelity Select Sector Retailing fund (ticker FSRPX). The results from 1985 until today reveal this performance month by month:

For example, the gains for November are calculated from October’s closing price until November’s close. The first column indicates the month, and the fourth is the profit factor. Clearly, November, March, and February are the best months. We can’t offer much insight as to why, except perhaps for Black Friday in November.

Retail stock performance (seasonal and calendar effect)

Let’s test being invested only during the three best months in the retail sector:

Covid-19 made a real dent in the performance in 2020, but apart from March 2020, it has been a steady climb. The average gain per month is 2.63%, CAGR is 7.7%, and the profit factor is 3.04. The graph shows 100 000 compounded with no leverage. The strategy is invested 25% of the time and has captured almost all the gains from “buy and hold”, which was 9.6%.

If we split November in two, the test reveals the second half of November performs slightly better than the first half. Is that due to the growth of Black Friday?

Is this seasonality likely to keep working? Typically, edges come and go for several reasons. One of the primary reasons for this not to work in the future is the composition of the fund (the holdings) and the growth in e-commerce.

Retail ETFs:

If you want to dig further and perhaps trade some retail seasonalities, you might want to use ETFs. There are some retail ETFs, for example, XRT and RTH. However, the tests perform worse on these two than on the Fidelity sector fund. The reason is the compositions and holdings. We believe backtesting works, but be vigilant for the small details like compositions etc.

How do seasonal trading patterns manifest in the stock market?

Seasonal trading patterns in the stock market include various effects tied to holidays, events, and specific times of the year. Examples include the Holiday Effect, Post-holiday Seasonal Effect, Election Day Performance, and the impact of events like Valentine’s Day and Thanksgiving on stock prices.

How long do seasonal trading patterns last, and do they change over time?

Seasonal trading patterns don’t last forever. Markets are non-stationary, and the effectiveness of seasonalities may diminish. Historical success, like the January Effect, may dissipate over time. Traders need to adapt to changes and avoid premature conclusions based on limited observations.

What is Calendar-Based Strategies?

Calendar-based strategies and seasonal trading strategies share lots of similarities but are not necessarily the same.

  1. Calendar-Based Strategies: These strategies involve making investment decisions based on specific dates or periods within the calendar year. For example, investors might buy or sell stocks at the beginning or end of the year for tax-related purposes, or they might adjust their portfolios based on seasonal patterns such as the January effect (where stocks tend to perform better in January).
  2. Seasonal Trading Strategies: Seasonal trading strategies also involve timing trades based on recurring patterns, but these patterns are usually related to specific seasons or periods within the year rather than just dates on the calendar. For example, agricultural commodities might exhibit seasonal patterns based on planting and harvesting seasons, while retail stocks might experience increased volatility during holiday shopping seasons.

Why is understanding seasonality important in trading?

Understanding seasonality is crucial in trading because many anomalies in backtests are likely camouflaged seasonalities. Seasonalities can be valuable inputs into trading strategies, providing structural edges that may persist over time.

Glossary – Seasonal Trading

Seasonal trading strategies are a great tool because they offer diversification. To help you better understand the potential strategies you are missing, we have made a glossary of the most important terms and phrases:

  1. Seasonal Trading: A strategy that involves buying and selling financial assets based on recurring seasonal patterns.
  2. Calendar Effect: The tendency of financial markets to exhibit consistent price movements during specific times of the year.
  3. Santa Claus Rally: A seasonal phenomenon where stock prices tend to rise in the last few trading days of December.
  4. January Effect: The historical tendency for small-cap stocks to outperform large-cap stocks in January.
  5. Sell in May and Go Away: A trading adage suggesting investors should sell their holdings in May and re-enter the market in November to avoid summer market weakness.
  6. Seasonal Investing: A strategy based on seasonal patterns in asset prices and economic conditions.
  7. Periodic Trading: Engaging in trades at specific, predefined periods throughout the year.
  8. Seasonal Market Timing: Deciding when to buy or sell assets based on seasonal trends in the financial markets.
  9. Cyclical Trading: Making investment decisions in alignment with economic cycles and market trends.
  10. Trend-Based Trading: Executing trades in accordance with prevailing market trends during certain times.
  11. Calendar-Based Investing: Managing investments based on a predefined calendar or schedule.
  12. Weather-Influenced Trading: Incorporating weather data and its impact on certain industries or assets into trading strategies.
  13. Climate-Driven Investing: Making investment decisions based on climate-related factors and their effect on specific sectors.
  14. Seasonal Portfolio Management: Managing a portfolio with an emphasis on seasonal adjustments.
  15. Climate Cycle Trading: Trading assets in response to climate cycles and their financial implications.
  16. Seasonal Market Strategies: Developing and implementing trading strategies focused on seasonal patterns.
  17. Weather-Dependent Trading: Utilizing weather forecasts and conditions to influence trading decisions.
  18. Seasonal Asset Allocation: Allocating investments into different asset classes based on seasonal trends and expectations.
  19. Economic Cycle Trading: Adapting trading strategies to capitalize on the economic cycles that impact financial markets.
  20. Seasonal Investment Timing: Deciding the timing of investments and trades based on seasonal factors and market analysis.
  21. Harvesting Gains: The practice of selling investments at year-end to realize profits and potentially offset capital gains taxes.
  22. Summer Doldrums: A period of reduced market activity and lower trading volumes during the summer months.
  23. Back-to-School Effect: An observed trend of consumer and retail stocks rising in anticipation of the back-to-school shopping season.
  24. Earnings Season: A period when many companies release their quarterly earnings reports, often leading to increased market volatility.
  25. Holiday Retail Play: A strategy focused on investing in retail stocks ahead of major holidays like Christmas or Black Friday.
  26. Tax-Loss Harvesting: Selling underperforming investments to offset capital gains for tax purposes before year-end.
  27. Weather-Related Trades: Investments based on weather conditions affecting specific industries, such as energy or agriculture.
  28. Summer Tourism Trade: Investing in companies related to the travel and tourism industry during the summer vacation season.
  29. Winter Energy Play: A strategy focused on energy stocks during the winter months when energy demand typically increases.
  30. Crop Cycle Investing: Trading agricultural commodities and related stocks based on planting and harvesting seasons.
  31. Gold Rush: The tendency for gold prices to rise during certain times, often during times of economic uncertainty.
  32. Oil Supply and Demand Seasonality: Trading oil based on seasonal factors like heating oil demand in the winter or driving season in the summer.
  33. Tax Deadline Trades: Making investments based on anticipated market movements around tax deadlines.
  34. Back-to-School Sales Stocks: Investing in companies associated with school supplies and clothing retailers before the school year begins.
  35. Halloween Trade: A seasonal strategy that involves investing in companies associated with Halloween, such as costume and candy makers.
  36. Thanksgiving Effect: A tendency for U.S. markets to experience positive returns leading up to and immediately following Thanksgiving.
  37. Christmas Tree Rally: The historical trend of stock prices rising in the weeks leading up to Christmas.
  38. New Year Effect: The phenomenon where stock prices tend to rise in the first trading days of the new year.
  39. Winter Sports Investments: Focusing on stocks related to winter sports and equipment during the winter season.
  40. Valentine’s Day Retail Play: A strategy centered on retail companies related to the Valentine’s Day gift-giving season.
  41. Tax Refund Trades: Investments based on consumer spending patterns following tax refund season.
  42. Spring Cleaning Stocks: Investing in companies associated with spring cleaning and home improvement.
  43. Easter Basket Trade: A strategy focused on companies that benefit from Easter-related spending.
  44. Summer Festival Investments: Focusing on companies involved in summer festivals and events.
  45. Holiday Travel Stocks: Investing in airlines, hotels, and travel-related companies during holiday seasons.
  46. Monsoon Trading: A strategy related to stocks affected by the monsoon season, particularly in agriculture and infrastructure.
  47. Autumn Harvest Trade: Investments in agriculture and food-related stocks during the fall harvest season.
  48. Daylight Saving Time Effect: Changes in trading patterns and energy stocks as daylight saving time shifts.
  49. Firework Industry Stocks: Focusing on companies involved in the production and sale of fireworks ahead of Independence Day.
  50. Summer Apparel Investments: Trading fashion and clothing stocks during the warmer months.
  51. Outdoor Recreation Stocks: Investing in companies related to outdoor activities during the summer season.
  52. Holiday Shipping Trade: A strategy focused on logistics and delivery companies during the holiday shopping season.
  53. Gardening Industry Plays: Trading stocks related to gardening and landscaping during the spring and summer.
  54. Summer Food and Beverage Stocks: Investments in food and beverage companies during the summer season.
  55. Ski Industry Investments: Focusing on ski resorts and related companies during the winter season.
  56. Fall Fashion Play: Trading in fashion and clothing stocks as consumers transition to fall wardrobes.
  57. Pre-Holiday Inventory Trade: A strategy related to companies managing inventory levels ahead of the holiday season.
  58. Summer Rental Property Investments: Investing in real estate associated with summer vacation rentals.
  59. Cruise Line Stocks: Trading cruise line companies during peak cruise season.
  60. Harvest Festival Investments: Focusing on companies involved in fall festivals and events.
  61. Summer Movie Blockbuster Trade: A strategy centered on movie studios and theater chains during the summer blockbuster season.
  62. Back-to-College Stocks: Investing in companies catering to college students before the fall semester begins.
  63. Fourth of July Firework Retailers: Trading stocks of companies involved in fireworks retail.
  64. Sailing Industry Investments: Focusing on companies in the boating and sailing industry during the summer.
  65. Tax Preparation Stocks: Investing in companies offering tax preparation services ahead of tax-filing deadlines.

Summary

Understanding seasonal trading is important to succeed in both trading and investing. Most of the anomalies you find in the markets are most likely camouflaged seasonalities. Keep this in mind and keep looking for seasonality in trading together with other parameters (or the other way around).

We regard seasonal trading strategies as one of the lowest-hanging fruits in the market, both in stocks and commodities.

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