Easy Way to Get Burned by Seasonality

07/25/2012 10:33 am EST


Larry Williams

President, ireallytrade.com

No seasonal patterns are set in stone, warns Larry Williams, but traders can look for important validation signals before executing seasonal trades to vastly improve their odds.

We're talking today about seasonality and how to make that work for you in your trades with Larry Williams.  Larry, this is something that you've done quite a bit of research into?  What have you found? 

Well, quite a bit.  I wrote the first book about seasonal tendencies ever back in 1973. What I've found after all of these years looking back at my work and other people's work-they've added a lot to it, Jake Bernstein, Steve Moore, and on and on and on-is they do work, but not all of the time.  So you have to be very selective, and you have to understand what's really happening in a seasonal pattern.  So you have to have something else to confirm the pattern.

Well talk a little bit more about that then.  What additional confirmations would you be looking for? 

Sure, you can look for a couple of things.  The first thing would be some other fundamental data.  Let's say the Commitment of Traders report.  If the commercials are bullish at the time of a seasonal low, well, most likely the seasonal low is going to work this year.  That would be one example. 

Is there something that you see differently, maybe even across decades or multiple years, or really are you just looking at these twelve-month time spans? 

Well you're looking at that pattern that's averaged over the twelve-months of what usually happens in a year.  As I said, it doesn't always happen, but this is an important point.  You have a seasonal tendency, say to bottom here, rally here, and come up.  If price this year is actually making a lower low when the seasonal tendency says you should be making a higher high, obviously it's not congruent, and the seasonal pattern to rally this year isn't going to take place.  So I look for the congruency in the seasonal pattern of price now versus the pattern.

So it's really all about watching that pattern, not assuming that something is going to happen in a specific way? 

That's it!  That's it!  Everybody has assumed these seasonals repeat year after year. They don't!  If it was that easy, it would be really easy to make money.  So you really have to pay attention.  Is the market fitting the model this year?  If it is, it's probably going to work.  If it isn't, it's not going to work.

So how should people be prepared to go in and look at seasonality when they are doing their trading? 

You have to work.  Unfortunately it's not easy.  You have to look at your charts, and look at the seasonality, and then see is it working with the seasonal or is it not.  Is there something that it confirms or says that it will most likely work? 

Larry, thank you so much for sharing these views today. I really appreciate it.

My pleasure.
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