Trading Seasonality: Should Traders Take Breaks?

Is Taking a ‘Time Out’ Good for Your Trading Psychology?

Taking a break from trading can help you reset your mind, evaluate your performance, and improve your trader psychology. You can use the concept of trading seasonality to plan your breaks and optimize your strategies. Trading and market seasonality refer to the patterns of market behavior that vary according to the time of year. For example, some markets tend to be more volatile or more bullish during certain months or seasons. By understanding these patterns, you can adjust your trading style and take advantage of the opportunities that arise. You can also avoid trading during periods of low liquidity or high uncertainty, and use that time to review your progress and improve your skills. 

Day trading can see momentum being sucked dry, resulting in small profits and losses, as the market is not moving as significantly. This can affect morale and concentration. 

Errors are easier to make when the market is putting you to sleep, as breakouts are more challenging to find and are more dramatic when they occur. Remember that trades don’t necessarily need to be made every day, especially when there is minimal volume and price movement. 

So, do the months of the year really affect the markets? 

How About Summer Vacations?

Many traders have followed the strategy of “Sell in May and Go Away” for years, believing that the summer months are usually sluggish for both the forex and the stock markets. June until August typically means taking a break, rejuvenating, and coming back with a clearer mindset. This applies more to Northern hemisphere countries since the majority of foreign exchange flows originate from cities such as London and New York. 

Even governments take a summer sabbatical. The UK parliament’s break typically lasts six weeks, usually commencing at the end of July. 

Every year, the US Congress and the House recess for the month of August. This has been a tradition that dates back to 1791, as congressional members were not full-time politicians.  

And as We Close In on the Year-End?

The winter months may seem a lot different. Although there is an obvious holiday period at that time of year, Christmas is usually busier due to the final rush towards the end of the year.

It has been observed that the end of December is a good time to buy certain stocks, as they may be poised for a rise early in January. There’s another advantage as well, as many investors start to sell stocks at year-end, especially those that have declined in value. Therefore, the last trading days of the year can offer some bargains. 

Does the Season Affect the Psychology of Traders?

Summer is considered the most challenging trading period, alongside the run-up to the Winter holidays. At this time, many traders separate themselves from the market to take a break. This leads to lower liquidity, which in turn increases volatility. Price behaviour then becomes less predictable. 

You can examine the signs in volume, as there may be reduced ranges on the instruments being traded. Rather than 60-80 pip moves, markets tend to move 10-20 pips or the equivalent in points for stocks, indices, etc. 

When it comes to news reports, they are usually less juicy as the market moves are based on predictions or speculation rather than actual, tangible news events.  

However, this is how it works in theory, so does the volatility and liquidity of markets really change in summer? Do the performances of financial instruments depend on the seasonal factor? Are there cyclical seasonal patterns in the instruments of different markets? 

Should the Seasonal Factor Change Your Approach to Trading?

Most online resources describe the Summer and the New Year cycle as the most unpredictable trading period. 

Regardless of the seasonal approach, small speculators and some large traders whose plans are unknown continue to remain in the market. This could be one reason for the constant, unpredictable breakouts of resistance and support levels. 

Seasonal analysis allows us to see relative patterns of growth or decline. 

We can clearly observe the cyclical nature and psychological regularities in the market. While technical analysis helps identify strong psychological resistance and support levels, statistical analysis helps identify market patterns. 

What Markets Can Be Affected?

Oil and Natural Gas demand increases during the winter months as demand for energy rises. Subsequently, summer periods create a higher demand for electricity, as air conditioners experience a sharp rise in usage.   

Energies are unique because, in addition to geopolitics and speculative factors, their prices are greatly influenced by direct demand from sectors such as the transportation and aerospace industry. 

The winter volatility in oil and natural gas commodities is partially due to the fact that these energy sources are primarily extracted from the ground in the spring and summer months and stored for use during the autumn and winter months. 

Are Oil and Gas Big Movers?

Because Gold is mined year-round, its supply remains relatively steady. However, apart from the recent geo-factors related to the Covid-19 pandemic, past years have seen gold traditionally jump towards the end of the year. 

During the Autumn months, the Indian wedding season is in full swing, with a significant impact on gold buying. 

Following that is the Western holiday season, during which gold jewelry demand surges for holiday gifts. 

This is followed by the Chinese New Year in February, which usually leads to further demand. Therefore, it is important to keep an eye on this as the metal market can be quite volatile. 

How About Stocks?

Every year, stocks tend to repeat seasonal trends. This is more obvious in the case of individual companies, such as large agricultural corporations, which are able to produce a stockpile in the summer months.  

However, sectors such as retailers or technology companies do not exhibit seasonal patterns, as demand typically arises from news releases or upgrades to their latest products. 

Therefore, when trading shares of individual companies, investors should also consider the specific characteristics of their activities. 

In addition, the end of a quarter is usually a significant period, as earnings season, annual reporting, and dividend distribution periods could bring a sell-off into the market. 

Does Forex Remain the Same?

Foreign exchange reacts to the seasonal factor even less than most other markets. In the case of commodities, for example, there is at least a partial influence of growth in consumption. However, currency trading in terms of volatility due to ongoing fundamental developments is essentially the same at any time of the year. 

The effect of seasonality trading on currency pairs appears to be highly exaggerated. Local price changes during national holidays can happen, but there is no clear pattern. There is also no trend of volatility or flat period in the summer or winter. Therefore, investors will gain a lot more from the market if they rely on more serious fundamental factors. 

In contrast to commodities and stocks, the values of currencies are based upon the policies of central banks and domestic economic performance.  

Ultimately, it largely depends on the specific asset or instrument the trader is investing in. Studies have shown that during holiday periods, volumes can fluctuate, resulting in interest levels peaking and then declining. 

Therefore, ‘taking a break’ generally comes down to your own perspective. The seasonal factor should not put you off trading if you see an opportunity in the market. After all, sometimes the best time to enter the market is when there is less volatility.