May 28, 2024
a tablet showing stock trends

What is Stock Market Seasonality?

From NFTs to cryptocurrency, the trading world has become more and more complex, or at least it seems it has. The team at Trading Alphas has built an empire on a traders helping traders foundation, making options strategies for beginners and daytrade strategies accessible and understandable for everyone.

With the global economy being what it is, there’s never been a better time to start investing in intelligent ways to make money, even if as a side hustle. However, as with any investment, to do so without a proper understanding of how it works is no different from doing so blindly. With an 85% win rate, they say that understanding trading chart patterns is the basis of any good beginner’s guide to options trading.

Peak And Off-Peak Seasons

Like the weather, there are seasons to trading, and some are more profitable than others. If you have a look at economic statistics from any year published by a government, you might see that the fine print says it’s seasonally adjusted, which means that seasonal bias has been removed.

Think of it this way: certain items are in higher demand at a particular time of the year. For example, with air travel, there is peak season and off-peak tickets, and the off-peak tickets are always cheaper because those are the times of the year when fewer people are traveling. The pattern repeats every year, which is why people who are not bound to certain schedules can opt for the smart move to travel in the off-season.

To understand seasonality, you have to understand human behavior and how trading patterns correlate. Anyone can know the seasons and their implications, but once you understand the human and socioeconomic factors, you can analyze everything from headline news to chatter on discord community platforms to make calculated predictions and maximize your gains.

It’s important to remember that when a pattern is public knowledge, you can expect the masses to use it to their advantage. For example, if a stock is predicted to rise in the summer, a smart move might be to start buying before they started this summer, and this would cause a push in the prices. Smart traders would foresee this and start buying well before the summer to get ahead, but this could go on and on, meaning that traders could simply buy earlier to take advantage until there came a point where there was no earlier and prices were simply rising in anticipation.

This is why it’s not wise to follow anything that’s easy to observe, or you’ll end up with assets that are priced in. This doesn’t mean that it’s impossible to profit; it simply means that the analysis of risk and reward needs to be more complex.

man using a laptop for options trading

So while you can’t allow seasons to dictate how you trade, you can treat it as a base understanding of when and where, so long as you continue to appreciate the many factors involved in beating the stock market, even if you’re only a beginner at options trading.

Bombs Away In May

The summer effect is one of the oldest seasonal observations in the trading community. It stems from a realization that stockbrokers in London took extended vacations and lowered the volume of buying and selling, making summer a weak season. In recent times the same could be said for Wall Street traders and portfolio managers. The simple approach would be to buy stocks in October, hold them till April, and then sell, but then again, you’re missing roughly half the year and half the opportunities.

Today champion stock traders are not restricted to high society and financial districts. Anyone with a laptop can start buying stocks, which makes it more complicated to predict behavior.

The year 2020 so a strong summer for tech stocks. The realization that the pandemic wasn’t going anywhere anytime soon had finally settled in, and people were jumping at the opportunity to have a part and a profit in the newfound technological dependence that the world had found itself in.

However, even without the pandemic effect, there are still positive returns to be found in the summer, even if they’re not as strong as they would be in the rest of the year. Those who choose to play it safe and stay out of the market until fall lose out.

The Holiday Bonus

The season’s greetings are visible in market trends, partly due to the mass distribution of bonuses and upcoming taxes. The days between the 25th of December and the 1st of January are highly active, although the timeframe might differ.

a woman looking at a drop in value

For some, the bonus season starts a week before the American Thanksgiving and extends to January, which is why this season is a prime example of making sure it’s your observations that in form would you buy and sell, as opposed to patterns that are public information. Here you’ll see the clear difference between the seasoned trader and the novice: when asked about their decisions, the movie’s explanation might seem more sensible and informed, whereas the experienced trader might have a justification that seems totally random.

If you look at 20 years of data from Standard And Poor 500, there is very little evidence that a bonus season actually exists. Ultimately the rises and falls of the market come down to millions making decisions based on millions of factors as large as a freak weather event or as small as having missed their morning coffee. For one to claim that they understand the science of how to beat the stock market would be to flout the very principles upon which it’s based, which is why each trader will have their own combination cocktail of considerations created overtime that tells him when to hold and went to cut losses.

While you should observe the holiday season, you can’t use it as an immutable rule by which to develop your swing trading strategies. Anybody who claims to know for certain exactly which way something will go is certainly trying to mislead you. To respect the strategic depth of the stock market is to admit that there is no knowing.

a woman using her iPad

While you should be aware of stock market commentators and trading gurus, you also have to realize that your ability to see what others don’t is what will drive your investments up. Trading Alphas offers option trading subscriptions and community support for option and swing trading on Discord. Click here to get in touch and learn more about their private Discord community.

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