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How to use seasonal trends to trade Commodity CFDs?

01 Seasonal Trends Analysis

Professional traders make use of every bit of intelligence that they can get in order to gain an edge in the markets. There are a number of ways to do this. The trick is in applying the right kind of data. Among the many such available data, seasonal trends or seasonality is one such facet that can greatly improve your trading performance.

Many traders tend to apply the information incorrectly. For example, the seasonality trends can be applied to Forex as well. But given the fact that there are a number of variables involved, it cannot be that accurate. Thus, sticking to the instruments where seasonality can be applied helps traders to block out the noise and look for potential trading opportunities.


What are seasonal trends and how does it work?

Seasonal trends, as the name suggests applies to analyzing an instrument such as commodity. It looks into the historical data in order to understand any repeating patterns. In one way, seasonal trends analysis looks similar to technical analysis.

The truth is that seasonal trends are part of technical analysis. However, it gives traders the insight into things others might have missed.

Seasonality analysis begins by first understanding how a particular commodity behaved over the past few decades. Then, plotting the performance over the years, one can get how a commodity is behaving during certain times of the year.

Seasonality is more common in the commodity markets. These include crude oil, gold, natural gas, agricultural futures or CFD’s and so on. What makes these commodities the perfect candidate for seasonality analysis is straight forward; the supply and demand.

Unlike regular forex instruments, commodities behave differently, The prices in the commodity markets are set by supply and demand. Or in other words, this could mean producers and consumers. Seasonality is big when it comes to the futures markets and thus by extension to commodity markets.

For example, natural gas CFD or futures tends to observe the seasonal trends. Natural gas consumption typically increases into the winter months. This is when demand outperforms supply.

In such cases, due to higher demand, the price of natural gas tends to rise naturally. Similarly, during the summer months, the demand falls, thus automatically giving rise to higher supply.

This is when you will notice that the prices of natural gas starts to fall due to higher supply.

Similar trends can be observed in the agricultural markets for example. Here, unlike the trends in the natural gas, supply and demand is determined by the sowing and harvest periods. There are months when a particular agricultural commodity starts its sowing period and there are months when the produce is harvested.

This leads to imbalances in the supply and demand.

Commodity CFDs tend to be a better pick for seasonal analysis because the trends in these markets are very clear. Furthermore because these markets act upon seasonality, they offer a better chance of trading the trends.


How to use a seasonal chart?

To begin with, let’s address the first question. You do not have to build a seasonal chart yourself. There are a number of websites such as seasonalcharts.com which offer you the data free of cost.

The chart below for example, gives the seasonality for the natural gas that we discussed earlier.

02 Seasonal Chart NG Futures

Seasonal Chart for Natural Gas Commodity (Source: Seasonalcharts.com)

The data above shows the seasonality of the natural gas futures for the past 17 years. What we can learn from this chart is that prices of natural gas typically rise between the February through April months (the winter months).

Following this uptrend, you can see that prices consolidate before going lower from June through July (the summer months).

Then, prices start to gradually rise from early September into late October. This is when consumers start to stockpile natural gas for future consumption needs.

With the trends established by the seasonality, traders can now apply their preferred technical analysis to the commodity of their choice. By analyzing the trends in the current chart, one can combine this knowledge with the seasonal patterns in the commodity.

This leads to a better confidence in the trade and can also create some very lucrative trading opportunities.


Should everyone use seasonal trend analysis?

If you are short term, intraday trader then the above methods do not apply. However, if you are long term trend trader then the information can be greatly valuable. Typically, you would be able to add to your existing positions and build into the trend.

We should also mention that seasonal trend analysis is not carved in stone. It is normal to expect some deviations from the established patterns. However, overall, the seasonal trend analysis can be a great way to understand how certain commodities are behaving during certain times of the year. This gives the average trader better insights into how to trade commodity futures or commodity CFDs.

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