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A Detailed Guide for Trading Seasonal Patterns
on December 13, 2005
As someone who maintains two free trading websites that attract a reasonable amount of traffic, I am regularly asked to review (read: promote) various trading services, software programs, books, and other products. The vast majority of these requests I decline. Almost everything I review is something that I have used or currently use myself and have found helpful to my own trading. In this review, I will bundle two related books: Stock Trader's Almanac 2006 by Yale and Jeffrey A. Hirsch and The Almanac Investor by Jeffrey A. Hirsch and J. Taylor Brown. Although there is inevitable overlap between these volumes, they meet different needs.
I am a short-term trader by design-my holding periods average minutes, not days or weeks-so the information found in the Stock Trader's Almanac is most helpful to me as context. The Almanac is a spiral-bound book that is designed as a desktop companion for traders. Much of it consists of a calendar annotated with historical trading tendencies for that day, major holidays and market-moving events, and thought-provoking quotes. A typical notation in the calendar, for example, reads, "Week After Triple Witching Dow Up 11 of Last 14". Next to days that have significant historical directional tendencies, there is a picture of a bull or bear. That is the kind of context that is helpful to a short-term trader.
Where the Almanac shines, however, is in its pattern-based research. Among the broader patterns described in the book are market tendencies following bullish and bearish Januaries; best performing months in the market; best performing days of the week; and best performing months of quarters. Such information is useful context to longer-term investors as well as traders. Literally dozens of seasonal patterns are detailed in the book. It's a true research accomplishment.
This brings us to The Almanac Investor. It's a larger book, subtitled "Profit from Market History and Seasonal Trends". The first part of the book is organized month by month, reviewing the seasonal and historical patterns associated with that month's trading. As such, it is an organized review of the major findings of the Almanac. The next segment of The Almanac Investor is arranged by time frame and details trading patterns that range from half-hourly to weekly, monthly, annual, and beyond. A fascinating section revisits George Lindsay's "Three Peaks and a Domed House" pattern-something probably unknown to many newer traders who never experienced Lindsay's pioneering work. (For the record, his observations on "separating declines" and "middle sections" of moves might be more valuable than his more eye-catching peaks and dome pattern).
The next section of the book is where it really shines. There is a detailed accounting of the seasonal patterns associated with various market sectors, using long-term historical data with sector indices to establish the tendencies. For instance, The Almanac Investor tells us that the banking sector tends to be strong from October through June, but natural gas issues trade well from February to June. From these data, seasonal trading strategies with sector-based portfolios can be constructed. A very useful compilation of all available exchange-traded funds (ETFs), along with their price histories and major holdings, is designed to help readers implement such portfolios.
If I had to put it in a nutshell, I'd say that the Stock Trader's Almanac is a day-to-day desktop tool for staying on top of daily and larger market patterns; The Almanac Investor is a tool for trading those historical and seasonal tendencies. Both are clearly organized and well-written. My only caveat is that the analyses do not include actual statistical tests of significance, which is understandable given that they are not academic treatises. If you set alpha (the probability of chance occurrence below which you're willing to say a finding is significant) at .05 and then run analyses on every day, month, season, and year, you're bound to identify a number of tendencies that occur by chance alone. For that reason, I would not trade any of these patterns mechanically. I do, however, focus on the most robust patterns and utilize them as context for trade ideas. That alone makes both volumes highly worthwhile.