Introduction To Seasonal ChartsBy
Seasonal charts are useful tools for preparing yourself to structural biases that are not obvious if you focus on your charts in lower timeframes only. Seasonal factors are more obvious for commodities like the grains complex but often ignored by the traders in other financial markets. This article will explain the basic usage of seasonal charts and how to integrate that into your trading plan.
An Example Chart
Following is the seasonal chart of Emini S&P 500 for the month of July.
The seasonal chart gives you a visual presentation of the average price movement during the month.
The green line in the middle is the average closing price offset from the previous month close.
The red regions are the average high / low extremes from historical data.
The yellow region marks the midpoint between the red region extremes and the average closing price.
What I look for from season charts in the order of its importance:
1. Matching setup / swing with current daily chart
2. Current range extremes not exceeded relative to the seasonal chart
3. Trend bias that span multiple days to lean on
It is preferred that the trend bias to have thin average range (yellow zone). It is a sign that the historical bias is more consistent and directional. These trend bias are useful for swing plays.
Remember that not all months have strong seasonal bias. For months that show sideway market actions all month it can be used as a guideline to look for counter-trend plays.
The seasonal chart above shows that by the 5th trading day of July, ES has a tendency of drifting higher for 5 to 6 days. This tells you that if you are short, be ready for a rough ride going higher. If you are long, however, you know that it is a good idea to at least take some profit when the upward bias is over.
The big yellow expansion area during 12th to 18th trading day of July points to potential downside bias but the expanded range coverage means the historical behaviour is not as stable as the up drift period. It is a time period where daytrading opportunities will do well as the potential volatility is likely to increase.
Personally I prefer the stable trend setups for swing plays over the wild ones but it is just a personal preference.
Seasonal charts are tools to detect structural biases. If something consistently happens year after year, pattern will emerge from the data. The difficulty for many people is that they need a reason to believe in the pattern. It is actually not a bad thing because some patterns emerged could be just singular events that affect the market for several years only.
In the example here, July is the month of summer holiday. The up drift in early part of the month is direct result of low volume up drift bias. The rest of the month where volatility picked up is mainly due to earning reports and the all important economic reports for first half of the year. Hence the volatility and not necessary a directional bias.
Understanding where the patterns are coming from can help but not necessary if you follow my guideline of interpretation above.
I will write more on the subject once I gather more questions about it.