Why Seasonality Matters In Trading:

Seasonality Matters In Trading:

Patterns that repeat themselves at regular intervals over specific time periods are referred to as seasonal. The analysis of time series data from numerous distinct assets reveals that each asset occasionally exhibits its own idiosyncrasies or seasonalities. When stocks tended to rise in January, the January Effect in equities was arguably the most well-known example of seasonality (the effect seems weak lately).

Does a seasonal trading pattern occur consistently?

No, a seasonal pattern doesn’t always occur on schedule. We are discussing averages and statistics.

We have a seasonal trading pattern since the averages may show better performance, for instance, in the winter than in the summer. But that doesn’t mean that every winter we see a gain. A seasonal trading pattern may have a very positive average, but outliers may blame it. Even two or three observations can explain most of the results if you have few observations to support the seasonality. In trading, the win percentage is significant.

Seasonal trading patterns don’t last a lifetime. Before it stopped working, the aforementioned January Effect was one of the most helpful seasonalities. From the 1800s to the 2000s, January was a particularly good month for stocks. Over the past 20 years, this tendency has diminished.

Why Use Seasonalities In Trading Strategies

We believe most of the abnormalities you discover in your backtests are hidden seasonalities, which is the main motivation behind our study of seasonalities. For instance, the Turnaround Tuesday is largely due to seasonality rather than an oddity. Trading correlation may simply be a veiled seasonality where you observe it.

Seasonalities are also used in trading because they can be extremely useful inputs into strategies that combine other parameters.

At least in our stock trading, we heavily rely on seasonalities in both our research and live trading. We use a variety of seasonal trading techniques. The explanation is straightforward: We think most of the edges are structural, making them more likely to endure over time. For instance, the turn-of-the-month trading approach, which we like to refer to as a structural trading advantage, is probably the product of behavioral patterns.

Drawbacks With Seasonal Strategies

The quantity or absence of observations is one problem with many seasonal trading techniques. The financial markets are full of noise and randomness, so you must be careful not to draw any conclusions too soon. Since an annual pattern naturally only occurs once a year, it takes 30 years to collect just 30 observations. No statistical test can support this.

Having as many observations as you can is a general trading rule. The wildly successful Medallion Fund trades only short-term patterns because they seek a wide sample of data. When you are backtesting, keep this in mind!

The non-stationarity of markets is another problem. Nothing lasts a lifetime. The same holds true for seasonalities; thus, you must make up for any losses from seasonalities that stop functioning.

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.

Seasonalities In Trading Happen Because Of Order Flows

Recall that there are three daily stock market sessions: open, lunchtime, and close. Why is the lunchtime session less volatile than the opening and closing sessions? That is most likely due to the fact that more orders are placed during the opening and closing sessions.

Additionally, it is important to disregard any overnight news that can increase volatility in the first session. We think that this seasonality is structural and is more likely to endure over time.

Seasonalities In Trading Due To Weekdays, Holidays, And News

On Mondays, which are more volatile than other days, we observe the same seasonal characteristics. According to our theory, investors ignore news that breaks after the weekend.

Therefore, there is a structural explanation for why there is greater volatility at the start of the week and at the open.

Regulatory And Legal Seasonal Trading Strategies

The market’s finest advantages frequently result from regulatory or legal ramifications.

Legislation of laws and regulations frequently occurs, with many intended and unforeseen effects. For instance, there are always ways to get around laws that make it harder to sell stocks. It might be simpler for those who can shorten it if many people cannot.A significant portion of stock trading occurred through NYSE specialists until 2010. (for NYSE stocks, obviously). As a result, there was a big advantage around the open and close where order fill prices might be greatly improved. This is or was a seasonality in regulation.

Overnight Seasonal Trading Strategies

Almost all of the S&P 500’s gains during the past 30 years have occurred overnight, from the session’s finish to the following day’s opening. Owning the S&P overnight has produced a 10% yearly return since 1993, including dividend reinvestment; the day session from open to close has produced essentially no return. There is a very significant seasonality here!

Gold miners (GDX) follow a similar trend: a strong overnight upward movement and a poor day session. Learn more about these patterns and how to take advantage of them here.


To succeed in trading and investing, it’s critical to comprehend seasonal trading. The majority of market abnormalities are probably just disguised seasonalities. Remember this and continue to search for seasonality in trading along with other parameters (or the other way around).

In both the stock and commodity markets, seasonal trading methods are among the market’s “lowest hanging fruit.”

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