Trading Guide: How to increase your odds of success using seasonality in trading?

Just like we all wait for mangoes and ice-creams throughout the year to relish during the summer season, similarly, traders eagerly wait for trends to happen in order to make profits and enjoy the momentum ride! 

With the seasonal change, everything changes i.e. from our attire to taste buds and so does our approach towards trading.

Trading is an art and hence, our approach towards trading must change with the changing trends in the market.

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Understanding the seasonal trends becomes of utmost importance to find the right stocks at the right time.

Sunil Bagaria, Director at Choice Equity Broking Private Limited decode seasonality analysis and how traders can benefit from analysing past trends:

Seasonality analysis is one of the most popular methods of modern times. It refers to the cyclic trend of the business and stock performance. As a trader, it is the basic rule to ride the momentum.

In seasonal stocks, the chances of getting a strong trend are huge and thus, they offer potential trading opportunities. The risk-to-reward ratios are favourable too, and traders benefit out of seasonal momentum.

So, in short, seasonality analysis helps traders as well as the market participants to determine how often a stock rises every month of the year.  

How does seasonality analysis work?

The heart of the matter comes down to the fact that financial market cycles are primarily, investor behaviour cycles. Human nature doesn’t change, which causes the recurrence of past patterns.

So, taking note of crowd psychology, as in how they behave during a particular month or during a particular cycle, would enable a trader or market enthusiast to be well prepared beforehand.

In short, seasonality analysis is based on the popular premise that history tends to repeat itself. For example, the maximum demand for sugar is around Diwali whereas air conditioners are in huge demand during the summers.

Thus, the demand for such a product is high during their respective periods. With such a demand, we get to see a strong trend and that's what a seasonal trend is.  

Understanding a seasonal trend is important for investors as well as traders to get a fair idea about the sector’s performance for the coming quarters.

The demand will be high, the sales would be high, and so would be the stock price. Thus, seasonality analysis is a trump card that helps you stay in the game. 

Below seven stocks emerges from historical data based on seasonality analysis:-

The data is calculated for the past twenty years. The total positive year refers to the number of years wherein, the stock delivered positive returns.  

Finding the right stocks to buy at the right time always poses a challenge for investors. In such a scenario, the study of seasonal stock trends may prove to be a blessing in disguise as it may offer some insights but then, it’s neither rocket science nor a magic formula! 

Nonetheless, the above table has been made with an intention to guide you about the seasonal trends that can help you identify the powerful trends in the stocks.

It’s true that seasonal trends aren’t based on hard fundamental data such as earnings or price-based technical indicators but then, it shouldn’t be ignored just because of this.

In fact, a given seasonal trend is a form of a psychological or sentimental indicator, as each seasonal trend is a measure of the tendency of the investment masses to act in a particular way in a certain repetitive form.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)