Seasonal Futures Trading

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Spread trading is a unique trading concept not all that familiar to the average commodity investor. The seasonal commodity spread trades commodity trader analyzes a particular market, either from a technical or a fundamental standpoint, sometimes combining the two; makes a determination as to whether the market exhibits either a bullish or bearish bias, and then wagers by going long a futures contract or purchasing a call option, or by going short a futures contract or buying a put option.

There are a number of variations on the theme, but the idea is basically the same. The following demonstrates the inherent disadvantages, in the above two scenarios, of an outright futures position or the purchase of an option.

The average investor has a limited account size, and can only withstand a certain amount of drawdown associated with any particular trade. The limited size of trading account necessitates the placement of a protective stop order above or below the position. The premature assumption of a position and the inherent volatility associated with commodity markets leaves the position vulnerable to a one or two day move that triggers the stop order, sidelining the trader as the position oftentimes turns back around.

In the case of an options purchase, you are basically purchasing time. As the purchaser of an option, the time clock and the calendar become your worst enemy. Seasonal commodity spread trades value of your option depreciates as you wait for the market to move in your direction.

Typically the purchaser of an option witnesses the market go up and down, as the value of his option changes, all along the remaining time value decaying on an accelerated curve as the option expiration day seasonal commodity spread trades nearer. Spread trading seasonal commodity spread trades the other hand, is a way of effectively combating the above two problems. Time no longer is an enemy and volatility, to a certain extent, is effectively reduced.

The market can go up or down, the trade seasonal commodity spread trades based only the relationship between the long and the short position, i.

Spread trades can be in the same commodity with different delivery months i. This allows for the built in "hedge". Seasonal spread trading is another opportunity to take seasonal commodity spread trades of this manner of trading. As there are many seasonal tendencies associated with various commodity markets, there are also seasonal tendencies associated with seasonal spread trades. Seasonality is a seasonal cycle that forms a similar, reliable pattern every year for many years.

Reliable seasonal tendencies are all around us. Everyone is familiar with weather seasonality. In the winter months the temperature is colder than in the summer months. Farmers will plant crops and harvest crops at about the same time every year. In the summer months, Crude Oil is usually higher than in winter because people drive cars more in summer. In the winter months heating oil is usually higher than in the summer because more people are trying to stay warm in winter.

At TransWorld Futures, www. Once the high percentage entry and exit dates are determined, it is time to examine the trade on the technical setup. Is the spread overbought or oversold, what are the resistance points? Basically does the trade look technically as well as fundamentally sound. There are a number of advisory services that offer seasonal spread trade recommendations based on historical analysis, but, by ignoring the seasonal commodity spread trades set up, may result in entering the trade too early, resulting in unnecessarily large draw downs, or in entering too late, missing the trade altogether.

We attempt to alleviate the stress, and do the leg work for you. The results from this unique form of trading have to be seen to seasonal commodity spread trades believed.

Please contact one of our friendly brokers today, and learn about one of the most consistent trade indicators. Customer Support Toll Free - Seasonal Spread Trading Spread Trading Spread trading is a unique trading concept not all that familiar to the average commodity investor. The following demonstrates the inherent disadvantages, in the above two seasonal commodity spread trades, of an outright futures position or the purchase of an option; 1. Trading futures and options is not suitable for everyone.

There is a substantial risk of loss in trading commodity futures, seasonal commodity spread trades and off exchange forex. There is a substantial risk of loss in trading commodity futures and options on futures. Only risk capital should be used when trading futures or options.

Investors could lose more than their initial investment. The lower the Day Trade Margin the higher the leverage and riskier the trade. Leverage can work for you as well as against you, it magnifies gains as well as losses. You should consider carefully whether futures or options are seasonal commodity spread trades to your financial situation.

Past performance is not indicative of seasonal commodity spread trades results. If the market moves against your position or margin levels seasonal commodity spread trades increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit.

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In statistics, many time series exhibit cyclic variation known as seasonality , defined as the repetitive and predictable movement around the trend line.

It is detected by measuring the quantity of interest for small time intervals, such as days, weeks, months or quarters. The best known seasonal progression is the outdoor temperature. Based on the time of the year, you probably know the range of temperatures you can expect. For now, you can think about the pattern as an average temperature for a given day over all years. Temperature pattern is calculated in the next picture red line is the pattern, black lines are the individual years charted on the same X axis:.

Now imagine instead of temperature some commodity price. Buy in February, close and reverse position around the end of July and close at the end of the year. And repeat that every year. But the prices of goods are subject to seasonal tendencies as a result of natural processes, for example harvest supplies of grain peak at harvest and drop off through the year or weather periods occurring at various times of the year oil is less expensive in summer than in winter during the heating season.

And we have other important annual events, which can create yearly cycles in supply and demand. For example, the U. Most of the commodity prices are influenced by supply. Heating oil is exception as prices are exposed to demand forces more than supply. Heating oil has a seasonal trend to move higher from July often the hottest month in the year, the demand is low into October. This is mainly caused by refiners building their inventories and the commercial buyers making their purchases.

Increasing demand pushes prices higher. Usually people believe that heating oil makes seasonal highs during the winter, but this is usually not the case. Most of the buying for heating oil is done before the beginning of the winter. Refineries with full inventories are prepared to meet demand and market starts to deal with distribution into the retail market which means liquidation and price drop. But sometimes we can be surprised by external factors which can impact on the heating oil market and cause counter seasonal trends.

With extremely long cold winter, the demand for heating oil can increase together with prices. You can see all of these tendencies on 20 years pattern shown in the picture:.

Agricultural prices move when anticipating change and adjust when that change is realized. When these changes are annual in nature, a recurring cycle of anticipation-realization evolves. These known cyclic patterns driven by known fundamentals can inspire confidence. The soybean market is dominated by two major producers: Brazil and the the United States. Soybeans are harvested in November-December in the the U. The most reliable cycle in soybean prices is the one-year seasonal cycle.

Prices develop sideways to lower into the "February Break" as the U. Beans usually make a seasonal low at harvest time during October or November. September shows rally as concerns about early frost which can damage the crop can arise. Another important characteristic of the soybean seasonal cycle is a high during April, May, June, or July. The timing of the seasonal low is usually more consistent than the timing of the seasonal high.

Treasury Bonds often hold seasonal correlation opposite to the equity markets and can be used to place money when stocks are negative. Picture below shows the seasonal pattern of bond investment. We can see weakness from the beginning of the year followed by rally in the rest of the year.

So if you want to buy bonds, May is obvious choice. Now we know what the seasonality is and we saw some examples of fundamental conditions behind it. But there are dozens of markets to trade and fundamental analysis can be very difficult for common retail trader not every seasonality is as clear as for Heating Oil. Remember, this is area of the other players — commercial hedgers which use markets for their business, not for speculation.

And you can never hope to have information as available as they do and be able to understand and cover in necessary detail all the markets. But we know that fundamentals and seasonal tendencies are already included in the price and work with that. Having enough of historical data, good knowledge of math and statistics, we can try to construct our own seasonal patterns derived from previous years. In the good old days, before the dawn of computers and their application in trading, it was quite difficult to create seasonal patterns.

But nowadays, with an easy access to a market data and computing power, we can derive seasonal pattern from daily data with any historical depth. How to calculate seasonal pattern? To cut a long story short, first we need to take all years we use for calculation, as can be seen on picture below Heating Oil — 20 Years:. Then we have to consider extremes. We are interested in seasonal tendencies, not in absolute values, and over the time some prices can have a very wide range.

The final step is to take normalized price for all years and calculate average. You can see resulting patterns in previous example charts. Of course, there can be a question, how many years we should use for calculation. Ten, fifteen, twenty or whole available history? Usually fifteen is a good compromise, but it is also very useful to include less and more years patterns, such as five and twenty years, to see the changing tendencies in history.

For example, when Brazil became major soybeans producer, seasonal pattern changed almost upside down. Or, the other reasons can be the technical advancement in agriculture, improvement in storage techniques, changes in geopolitics and so on. And stability of the seasonal trends is something what is good to be aware of. There are several ways how to use seasonality in trading.

You can use it as an additional component in your discretionary or automated trading system. Seasonal factor can be included with according weight in calculation to obtain trading decision. The weighting depends on the market, seasonal pattern and importance of any other remaining parameters.

Another technique can be using seasonality as a filter. Never open position against seasonal trend. Such a simple rule can increase your profit probability. But here at SeasonAlgo, we are focusing on seasonality as the main object to trade.

Our database contains thousands of seasonal strategies for each month. Although we have strategies for outright naked futures, the best strategies are for futures spreads. Trading spreads has many advantages, but speaking now about seasonality, these seasonal trends are much stronger and reliable.

We can use not only seasonality of underlying commodity, but also relations between different futures contract months. For example, due to harvest pressure and the trading of two different crops at the same time, the tendency for some contract months to rise or fall faster than other months can result in nice spread opportunities.

The picture below shows classic bullish corn spread. Long December contract represents new crop, short July old crop. During the most extreme conditions, such as bad weather or tight supply, old-crop can rise over new-crop. But this happens very rarely.

Usual conditions are represented by seasonal pattern when the market inclines to favor new-crop over old-crop after the beginning of planting. Computer generated strategy with seasonal window for year is entering on March 28 and exit on Jun What is the position of current year compared to previous years? Seasonal movements are not precise, they can occur earlier or later, and technical analysis can helps us with timing of entry and exit. Seasonal strategies and patterns are based on statistical calculations over the past history.

There can be fundamental factors that occur every year and can cause seasonal moves, but statistical optimization and data mining can also produce strategies where no consistent price trend exists. There is no guarantee that price patterns will recur in the future. Even if seasonal pattern occurs in the future, it doesn't indicate profitable trades.

Results can be affected by transaction fees and position liquidation. All strategies give only hypothetical performance and are not adjusted for commission and splippage. There is no implication that anyone has in the past or will in the future accomplish profits with these strategies. Historical data and analysis should not be taken as an indication or guarantee of any future performance.

We are looking for traders who have website about trading. We can give you full access if you write a review about our software. You can also join our affiliate program. The information presented in this site is for general information purposes only. Although every effort attempt has been made to assure accuracy, we assume no responsibility for errors or omissions.

Everything is provided for illustrative purposes only and should not be construed as investment advice or strategy. This site disclaims any responsibility for losses incurred for market positions taken by visitors or registered users, or for any misunderstanding on the part of any users of this website. This site shall not be liable for any indirect incidental, special or consequential damages, and in no event will this site be held liable for any of the products or services offered through this website.

The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well for you.