I am not very old, but I have been trading for long enough to have my own opinion about traders and trading.
We all know that it is a difficult business, earning money in these markets is very challenging and very few traders suceed in the long run. No only do traders need to have discipline and strong fundamentals, but they also need to be adaptable. Markets are constantly shifting, every day, every year even on the same day. In addition, with robots now participating in trading, these changes are faster and more frequent and worst of all, more abrupt. If an asset’s value starts to go up or down, it does so more violently than ever. Many examples of this have occurred recently such as the flash crash and similar events in the currency and index markets.
These changes make trading a very complex activity. In the 15 years that I have participated in the financial markets, I have come across many traders and I could almost recall one expert during each era. People who did very well in the short term, made a lot of money and then the market changed and suddenly they extracted nothing out of the market. When I once visited a stock exchange with people who had done well trading, warrants and meff options had just started to be traded, but not one of those traders is still in business. I have friends that sell options, and these traders have done well in recent years with selling options while the market trends up with few scares as they profit. However, these trades have profitted only since 2008, because those who did the same before 2008 are no longer market participants. A similar nasty ending came to those overconfident traders who said that gold and silver would continue to rise forever. Then there are systematic traders who have worked for years and years adjusting and optimizing their strategies and who often start well but then the market changes, the patterns change and the system stops working and takes losses rather than generating profit. I could tell more and more stories of disaster but this is not the purpose of my post.
What I want to point out is that the market is constantly changing which makes it difficult to anticipate what it is going to do. It could be argued that the markets are cyclical. We already know the years in which the markets were bullish and then when they were bearish and back to the start again. But these cycles and their timing are impossible to know for certain and for this reason the turnover of cyclical traders and managers is enormous. For each part of the cycle there are some traders who succeed but in the next few they tend to fail. A good friend of mine that Works in the fund accounting business tells me that the turnover of money managers is very high. He says that 70% of new managers (funds in their first 3 years) close down for a variety of reasons.
The cause of all of this is the constant change of the market. If I were somebody that likes conspiracy theories, I would argue that somebody is manipulating the markets to cause them to shift and change so frequently.
After bashing the markets in the first page, what does the title have to do with the post?
Seasonality, is a rare type of trading but it is present and it exists mainly in raw materials.
Seasonality is determined by a cycle and in any given period, it cannot be said that from December 31st to the following December 31st, that any single event causes a cycle. For example the cycle in the grains is easily understood because it begins with plantation and ends with harvesting. It starts in April / May for corn and ends in Nov / Dec. So in the futures market the beginning of the cycle would be the December future contract and the end would be the July future contract. I know there is a September contract in the middle, but this is a special future that changes. If you plant late, it happens to be the last future of the old crop and if it is planted early, it happens to be the first future of the new crop.
We see this type of cycle not only in the grains but also in meats. Of course we barbecue more in the summer than in the winter and because of this, the consumption of meat is stronger in summer and in particular, on specific dates.
Of course we see cycles in the energy markets too. In summer we use more air conditioning than in other periods of the year and in the winter we switch on the heating. The same happens with gasoline, consumption is higher in the summer when we start the “Driving Season” holiday period.
In each part of the cycle the supply and demand of the product is different because the behaviour of market participants varies. However, this is repeated in each period, the “hedgers” meet their needs or cover their positions, and speculators based on the change in supply and demand relationships, take their positions.
As you see in most of the commodities, there is a cycle that is related to a time of the year and the benefit of this cycle is that it repeats itself each year and indefinitely.
Seasonal trading is not the holy grail as these cycles are not perfect and the cycles of each market are different because they depend on production, consumption and exisiting reserves but they are indeed repeated year after year, offering repeated opportunities.
I repeat that it is not a system and that it is not the holy grail. I have not invented anything unique. I only speak highly of a cyclical, seasonal effect that is observed over very long periods and in many markets. In regards to raw materials the cycles are annual and therefore knowing the timing of the cycles allows us to take advantage of these market movements.
Of course I am not talking about whether a market goes up or down, but I speak of market structures and there comes another important factor, which is how we use spreads (ie the simultaneous buying and selling of a future of the same product).
I have explained the seasonality of these spreads in a previous post. In the future I may add a further post to better describe how these spreads work.
In my humble opinion and after seeing many traders who have triumphed and then disappeared, I really believe there is a lot of alpha in the seasonality that at least to me combines perfectly with the spreads I am using. Of course I am not the best trader in the world, nor do I pretend to be. The only thing that I am looking for is to generate a constant alpha for myself and for my clients and to be in the market waiting for new opportunities that at least in our case come every year! Trading is a race. However, money is made by using patience and waiting with a cool head for the next opportunity that has a favourable risk reward ratio and it is important to control our emotions. The fact that we know that we will see the same opportunities return to us year after year allows us to more easily remain calm and patient.
An old Wall Street proverb:
“There are old traders around and there are bold traders around, but there are no old bold traders around!”
Thanks for your trust.
— Gregory Placsintar
Principal/Head Trader
— Miguel Sanz Castello
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GREGORY P. ASSET MANAGEMENT
Bill Reavis
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