So what? Once presented with this information, you should now be asking, “How can traders make money with this knowledge?” In the most obvious sense, if traders thinks it is a typical bull year, they would want to go long corn in the fall, when it’s traditionally at its seasonal low price, looking for an increase in prices into the following June.
Whatever your approach, you must manage your risk in every trade and evaluate a position based on the risk and reward expectations you have for it. For example, a lot of traders preach the rule of thumb that trades should only be considered that have a two-to-one or three-to-one measure of potential reward versus potential risk. Again, achieving this is easier said than done, and it depends on the likelihood of being right on the direction of the trade.
Seasonal trades, in theory, put those odds in the trader’s favor. Some trades, if they are promising enough, can be entered if they offer only one-to-one reward versus risk. A trader can take them with the confidence that the historical odds are on the side of being right.
With corn, if you expected the market to follow its seasonal bias, you would buy corn futures contracts at the beginning of October with the hope that prices would rise without taking too much of a dip in the meantime. The required margin (currently $2,025 initial, $1,500 maintenance) would be necessary.
Such a trade is not a place-it-and-forget-it proposition, however. It’s important to realize going in the risk you face to maintain this trade. Every time corn ends the day one cent lower per bushel, the trader must deposit $50 in his or her trading account to cover this drawdown. With the current daily price limit being 20¢, a trader may have a margin call of as much as $1,000 (20 cents x $50 for each penny) in a single day. The trader must put up that additional money quickly or be forced to liquidate the position at a loss.
There’s also the possibility that you are right, just not right enough. For example, corn prices may only rise 20¢ between October and the next June. The trader had to invest the initial margin of $2,025 and maintain that position in the face of any dips that occurred in the meantime, creating a less than one-to-one edge.
There is another way to get more bang for your buck, however.