Stock Market Seasonality – How to Use it in Your Trading Strategy

Just like the year has four seasons, the market has seasonal patterns also.

In the stock market however, the seasons are not very obvious, or easy to find for the new trader.

Today I will explain what stock market seasonality is, where to find the charts and most importantly how to use them.

 

Stock Market Seasonality Charts – What are They?

These charts are created by breaking history into monthly segments.

For example, every year, the market will be broken down into 12 individual chunks, each one containing the total performance for each calendar month.

If the market was up 5% in the first two weeks of January, but then drops 3% from the top to finish the month, market seasonality will show a total of 2% net in January.

Once you break down performance by month, you can then compare the results to other years.

What happens next is that every January is added for the last 10 years for example, then every February, etc.  Then voila, you’re done.

The totals will represent an annual stock market seasonality chart for the last 10 years.

 

Stock Market Seasonality Charts – Equity Market Example

Here is an example of a stock market seasonality chart:

What does it tell us? Well first thing, you want to identify is what the averaging period is.

In the chart above, courtesy of topdowncharts.com it shows (1964 to 2015).

This is a total of 51 years of stock market seasonality. But is that better or worse than one that would show 10 years?

It depends.

The longer the time frame of stock market seasonality, the stronger the annual pattern is.

However, it also means that one year the actual results might different greatly from the average, and it won’t effect the total as much.

One year is only 1.96% of the 51 year seasonality chat.

A big deviation won’t really change the overall results greatly.

Whereas, a 1 year time period is 10% of the total data in a 10 year chart.

One year will have a big impact on the total seasonality.

The shorter the stock market seasonality chart period, the more it will move in line with the actual market price.

So which one should you use?

Both.

 

Stock Market Seasonality Charts – How to Use Them in Your Trading

This is where the waters can get murky – because the real answer is that how you use them depends on your trading style and strategy.

Generally, if you are a swing trader, you can use these charts to open positions and add to them, and even stay through rough waters if a given month is a bullish one and you are long.

If you are a more active trader, you will want to use these charts a little more loosely.

Example, as a day trader myself I always remind myself that fading a strong rally is a terrible idea October through December.

If a market is ripping, the better opportunity is to trade from the position of strength and setup long trades on the drops rather than fading momentum.

I’ll include the same chart as above once again, so you can look at it while you read the next few points.

 

 

Here are some general stock market seasonality chart observations:

  • The market gets quiet between May and August
  • Despite the above, markets are more bullish in May, more bearish in August
  • The best 3 consecutive months for US equities are October through December
  • Stocks are seasonally strong between October to April
  • The single strongest month for stocks is April
  • August and September are the ONLY negative net months (funny how 2 months scare investors away from the other 10?)

There you have it, now you know what these stock market seasonality charts are, how they work and how to read them.

By now you should already have an idea of how to include them in your strategy, and even if you don’t they are very useful to know.

 

Stock Market Seasonality Charts – Where to Find Them

There are a number of different sources to find stock market seasonality charts.

One of my favorite is equityclock.com.

When you are looking for seasonality charts, be sure to double check the average period and what market they use to calculate their totals. This is very important!

You need to know what you are looking at, and how it is built, before you start relying on it for your trading.

 

Stock Market Seasoality Charts – Conclusion

This is a phenomenal tool as a day trader, investor or swing trader.

Use these seasonality charts to calibrate your trading and system.

You don’t want to go against seasonal trends, because they are very powerful.

Imagine deciding to wait under the lip of a 60 foot wave to headbutt it? Who do you expect to win?

I vote for you. ;)

 

What are some of your ideas to incorporate this into your trading?

We’d love to hear from you.

 

Have an awesome day and thanks for reading.

 

You can also learn about our institutional grade day trading package here, or learn to trade a more passive options strategy in our package here.

The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.