Market seasonality: real or not

Seasonality is a tendency that repeats at a given time of year. It does exist in the data, but the
way it is usually presented leads people to use it wrongly and lose money.

1. The patterns most often cited

• Thin liquidity around the year end
  — from mid-December into early January, volume drops noticeably across every market.
• A quiet August — the European and American holiday season, low liquidity.
• Seasonal gold demand — the Indian wedding season and Lunar New Year usually bring
  higher jewellery demand.
• Seasonal energy demand — the US summer driving season, the winter heating
  season.
• Quarter-end and financial-year-end rebalancing — creating cyclical flows.

2. Why not to trade on it

The sample is too small

Twenty years of data gives twenty observations per month. That is far too small a
sample for a reliable statistical conclusion.

Data mining

Try enough combinations — months, weeks, days of the week, instruments — and you will certainly find
several convincing-looking patterns that are pure chance.

The context has changed

Many seasonal patterns formed in an economic environment that no longer exists. Market structure,
participants and trading technology have all changed.

Larger forces override it

One surprise rate decision erases any seasonal tendency. Seasonality is a weak force; macro is a
strong one.

3. How to use it sensibly

Seasonality is useful as context, not as a signal:

• Adjust your expectations about volatility. Knowing that August and late December
  are usually quiet stops you being disappointed by a lack of opportunities, and stops you forcing
  trades then.
• Adjust position size. In thin liquidity the
  spread is wider and
  slippage heavier — a good reason to trade
  smaller.
• Prepare for real calendar events. Quarter-end rebalancing has an identifiable
  mechanism, unlike “September is usually down”.

4. Two kinds of pattern

The deciding question: is there a mechanism?

• With a mechanism: thin holiday liquidity because trading desks are away. Winter
  heating demand because of the weather. These are worth accounting for.
• Without one: “this pair usually rises in the third week of the month”. That is
  almost certainly noise.

5. The conclusion

Use seasonality to understand the environment you are trading in, not as a reason to enter. A trade
needs a reason grounded in price or in current data — the calendar is not a sufficient one.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.