How To Identify Seasonal Patterns in The Stock Market

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Patterns for Trading AnalysisNow it is important to start with an understanding that almost everything that people do has some type of seasonal cycle associated with it. The stock market, too, has a season associated with it. While the phenomenon is pretty complex and hard to explain in a few words, it is possible for traders to take advantage of it. Furthermore, mid and long-term investors can also benefit from these changes. Some short-term traders may also be able to make a few bucks based on this information.

Now it is a commonly accepted perception that the majority of money in the stock market is to be made between November 1st and April 30th, which is also incidentally winter. On the other hand, the period between May 1st and October 31st, i.e., the summer, should be avoided. That said, this is just a legend with no data to back it up.

The so-called legend led two Massey University professors to draft two articles on this very subject in 2012 entitled “Are Monthly Seasonal Real?”, The other was “Three Century Perspective and The Halloween Indicator: Everywhere and All the Time.” The papers included results from over 108 countries over a period of 319 years, which suggests that the divide between Winter and Summer is real.

The two most profitable months for traders are December and January; on the other hand, October and September tend to be the worst. So, there is reason to believe that winter tends to be on average more profitable as compared to the hot season, though it does not mean that the markets will swing in this same direction each year.

Now, if you are to observe over 300 years of history, there are going to be many outliers. However, the pattern, in general, is what needs to be looked at, as it outlines the nature of fluctuations in different seasons. At the end of the day, it is up to you to use this knowledge as a trader.

How can this information be helpful? Now, if you are a bullish investor, you will opt to trade during months where the return is highest, i.e., April, January, and December. On the other hand, an investor that chooses to short a position, i.e., a Bearish one, will decide to trade in October, September, and July.

While seasons do play a role as observed, it also depends on your trading strategy. Though when it comes to playing in the financial market, every little bit of information can potentially give you an edge.

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