“Those who do not learn history are doomed to repeat it.”
– George Santayana
We are often told that no one can predict the future, especially in financial markets, and we are also told that the “past does not equal the future”. Whilst there is some truth in this, I have to say that in my 31 years of trading I have found that there are patterns in financial markets which are worth looking out for and which can be used to profit.
From my experience, the idea that everything is totally random in financial markets is far too simplistic. This month I will take a look at “seasonality” and how you can use this when trading with Binary.com.
For those new to the concept, various studies and academic papers, including those done by the Stock Trader’s Almanac, show that the stock market has very clear bullish and bearish periods. The old adage ‘sell in May and go away’ is more than an old wives’ tale – with over 100 years of data backing it up, the seasonal bias is more than random.
(If you’re interested in getting deeper into the subject, Professor Ben Jacobsen, Abdullah Mamun and Nuttawat Visaltanachoti have a fascinating paper on the subject.)
Seasonality is a guide, not a guarantee
It’s important to realise that seasonality is a guide, not a guarantee. It’s like going to Vegas and seeing a slot matching that says it pays out 97% of the time; it doesn’t mean that if you put $100 in you will get back $97. The 97% is an average over time, normally many years, so your $100 could win you $10,000, or (most likely) you could end up with nothing.
So if a market has a seasonal tendency to go up in November to April, it doesn’t mean it has to go up in 2016/2017. I have seen many traders give up and curse a trading system just because it does not work for one year, even though it may have a 50-year positive track record.
The good news is that the US election is now out of the way, and regardless of your political views the fact that it was a clear win without resorting to recounts (remember Bush/Gore in 2000?) removes one market worry. Of course, President Trump has plenty more challenges ahead but overall the US markets – which are the main ones I follow – are looking ready to move higher again in the coming months, and seasonality is also giving the markets a tailwind.
Another factor which can also help is the year end effect, which normally sees many in a better mood. Market volatility tends to go down in December, with funds using the last few weeks of the year to square up positions, which normally has a positive effect on the markets.
December bullish month for US stocks – Trading idea
December tends to be a good month for US stocks with the Dow moving up an average of 1.5%. Volatility also tends to be lower in December and it’s a shorter trading month. With Binary.com you can back a market to be higher or lower than the current price in X days ahead. You could look to place a Binary trade on, say, Wall Street being higher than where it’s currently trading at. So say Wall Street is trading at 18,500 on 1st December, you can place a higher trade expiring towards the end of December. As long as the market is higher than the entry barrier, the trade will pay out – even if it’s just one point higher. This trade can yield around an 80% pay-out.
This has just been a brief outline and you can also find seasonal patterns in Gold, Oil and other markets, and these can all be traded at binary.com.
Just as weather and temperature can influence our eating habits, market seasonality can affect market returns.
My friend Jeff Hirsch is the editor of the Stock Market Almanac and runs a great blog here: http://jeffhirsch.tumblr.com/ where you can learn more.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. The views expressed in this report are those of the author and do not necessarily reflect the views or position of Binary.com. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Binary options trading may incur losses as well as gains.