Stop overcomplicating trading

|27th Dec 2023|


stop overcomplicating tradingIt’s that time of year again when I take some time out from trading to go back over charts, look at what I missed, and see what I could have done better. On review, it’s been a pretty good year with most assets having decent periods of trend, and I’m happy I was able to catch at least a small piece of most of the moves I was watching. But, and it’s a big but, it could have been much better and my No’1 take away from this year’s review is I need to ‘stop over complicating things’.

Looking over the year, stocks performed very well, particularly in Q2 and Q4, and were without doubt one of the best assets to be involved in. But stocks weren’t alone, with FX markets having good periods as well, particularly in Q4. Many commodities also performed well, most notably sugar, orange juice and cocoa, with gold and silver also coming to life in the last few months of the year. So, there were certainly plenty of opportunities out there for all types of traders.

What strikes me the most, however, is the path so many markets followed this year. We’ve had wars, fast rising interest rates, sky high inflation, but as I carried out my review (of hundreds of markets), so many markets simply followed the path they always follow. And I don’t mean they kind of followed it, they followed it for the entire year. 

Take a look at the chart of the DAX below. The orange line is the 20 year seasonal average, and the yellow line is this year’s price movement. We can see this year’s movement followed a very predictable path. The low in March was bang on schedule, as too was the high in July, including the entire rally in between. The weak period through August and September and the very strong last quarter rally. 

20-year seasonal chart for the German DAX

Granted the new seasonal platform where I did this review was only released in May, so this level of data wasn’t available until then, and the info for the DAX wasn’t added until a later update. But the review has still told me one thing, I need to simplify my trading and investing even more than I already do and focus more on markets that are following a predictable path. 

Now you’re probably thinking ‘yeah but that’s just the stock market’, and the German one at that, but the review not only found charts like this in many other stock markets around the world, but in every major asset class. From the Dow Jones to Swiss Franc to orange juice. Natural gas is another great example. It’s had a roller coaster of a time recently but one look at its chart below from this year and you can see straight away it did exactly what it always does. Weakness in Q1 followed by a bounce in Q2 leading to a range in Q3 and a strong decline in Q4. The same as it has typically done on any year over the last 20 years.
 
20-year seasonal chart for Natural gas

In FX markets we could look at examples in GBP, Euro, Swiss Franc, or even the Dollar index and see how closely they followed their typical annual path but the chart below is particularly intersting. The typical CADJPY seasonal pattern follows two very distinct stages, strength in the first half of the year followed by a large range in the 2nd, and we can clearly see this is exactly what we got again this year. 
 
20-year seasonal chart for CADJPY

This list could go on and on, but you should be starting to see what I very quickly saw during my review, I need to keep thing simple and focus on these more predictable markets, and maximise the information I can pull from these charts. Markets inherently have a path they want to follow and those that follow their path will be the easiest to trade.

Of course, not every market will follow a predictable path. Like ships that set sail for a specific destination, sometimes they get blown off course, but enough ships do make their intended destination and the same is true of markets. My job next year will be to find more markets following a set path. Thankfully this will be easier than it has ever been before by using the seasonal correlations feature 
within our seasonal platform. Markets that have a high positive correlation will be following their intended path. I will focus on trading these markets and look to maximise the returns from their strongest trending periods (such as March to June in the CADJPY example above).

This suits how I want to trade, but make sure when doing your own review you know exactly how and what you want to trade, and make sure any changes you make suit that style. 



Happy trading
 
Ray Gilmour
Founder & Senior analyst at Markets Made Clear.com