Many markets including the stock market, FOREX market and commodities have repeatable seasonal and cyclical patterns. I’m sure you have heard the old expression “sell in May and go away” which is a seasonal pattern for the stock market. Crude oil has distinct times of the year which is more bullish or bearish as do most commodities. This can be very helpful in your candlestick trading or investing if your strategies include active investing, swing trading or day trading (See my recent article on potent candlestick patterns).
I am often asked about seasonal patterns by our members at mycandelcharts.com, and if they are a useful tool. There is a lot written about these patterns on the Internet, in books, and some trading platforms even give you seasonal and cyclical suggestions. There is also one book that comes out on a yearly basis called “The Stock Trader’s Almanac” and it lists each trading day of the year, and whether it is bullish or bearish for the Dow 30, NASDAQ 100 and the S&P 500, as well as providing a lot of other useful information.
All of these tools are fine as long as they are used properly. I believe you should use all the tools you have available to increase the odds that your trades will be successful. These tools can be combined with your candlestick patterns or candlestick charting. It’s typically just not that easy to go long or short just because of the seasonal pattern, and rake in the cash.
How you use these tools makes the difference between helping or hindering your results. Just because a specific market typically goes down at a certain time of year doesn’t mean that it will definitely go down this year. These types of indicators, although useful, are very vague because they are basically averages of many different years price activity. It is very important to combine these seasonal and cyclical indicators with price activity and other closer derivative indicators that you may use. I typically call this type of indicator “background information”. It is good to know what the seasonal pattern is, but without price and other indicators in agreement, you don’t want to take the trade.
To be successful in the markets you can never be too bullish or too bearish because “anything can happen”. Don’t let these seasonal patterns put you in a mindset that allows you to consider only one side of the trade. You always have to be open for any of the possibilities and you should always consider all possibilities in advance. I have been caught a few times in my trading career by feeling very sure that I knew how price in a specific market would play out. I’d suggest that you use my experience as a bad example and avoid this.
We may have seasonal, and/or other classic technical indicators on our side, but if the price action is not in agreement with those indicators, then we cannot assume that this time period will follow the normal price pattern. So use them to your advantage as background information, along with your other indicators such as moving averages, but do not give them any more credence than any other single indicator.
New to candlestick charts? Check out Steve’s FREE video introduction on Candlestick Charting here.