Many traders contend that the number one rule of trading is to only risk money you can afford to lose. This advice goes beyond trading; it is a truth for starting any business. When it comes to trading specifically, a more apropos rule is this: Put the odds in your favor. But it’s fair to ask: What are the odds? And how, exactly, do you put them in your favor?
One advantage that physical commodities have over many other trading vehicles, such as stocks and bonds, is that most can be directly affected by seasonal tendencies. This can be based on many factors related to production and demand. Production factors might be growing seasons, weather-based shipping schedules, hurricane season or livestock birthing cycles. Demand factors might be based on business calendars, seasonal consumer preferences or heating and cooling days.
What this means on a practical level is that during every calendar year, as these seasonal factors conspire to move a market in one direction or the other, each commodity has a bias to rise or fall at different times. Of course, these repeating production and demand factors are not the only variables that move markets. Many bucket shops ensnare suckers by claiming they can take advantage of seasonal energy demand by buying into winter and waiting for the check once the snow comes. It is never that simple. However, seasonal tendencies are real and the bias they create is reflected in historical analysis for many markets. For traders, this means they don’t have to understand the fundamental rationale behind a particular move or bias, they just have to know it exists to put the odds in their favor.
One obvious market to explore for seasonal tendencies is corn. Millions of acres are planted every spring and harvested in the fall, year in and year out. “Corn over time” (below) is a seasonal chart for the corn market that is based on 55 years of cash prices.
The corn market is biased toward setting an annual low in the fall and peaks in early summer. It’s important to remember that this chart is a composite, and no one year necessarily matches this composite directly. Some years have been bull years, while others have been bear years. This is shown by the chart at the bottom of the graph. Even if a commodity has followed its historical seasonal tendency in nine out of 10 years, it is no guarantee that prices will rise in the 11th year.