V.10:8 (339-343): Detecting Seasonality by Lewis Carl Mokrasch, Ph.D.

V.10:8 (339-343): Detecting Seasonality by Lewis Carl Mokrasch, Ph.D.
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Detecting Seasonality by Lewis Carl Mokrasch, Ph.D.

Seasonal or cyclical patterns, whether real or only imagined, have been a popular topic among traders for years. Lewis Carl Mokrasch, continuing research published originally in his article in April 1991, presents this time a generalized method for detecting seasonal patterns. However, Mokrasch warns, there are certain caveats that the trader should be aware of, and he notes that the trader should take a good long look at the data involved for significant patterns before risking capital on so called seasonal trades. Here's how to figure it out.

Generally, investors sincerely want to believe that there is something inherently predictable and profitable about their preferred media of investment. Some advisors would have us believe that they can inform us reliably about future price movements in stocks, bonds and commodities based on historical price movement. The Stock Trader's Almanac has hundreds of intriguing suggestions on how the market will even behave on a certain hour on a certain day. Other advisory material tells us to buy January heating oil futures in July and sell them in December or to buy gold stocks in October and sell in February.

If there were such discernible patterns, every trader would try to exploit them. Then the patterns would vanish, because an overwhelming number of traders would be taking advantage of them. Indeed, a contrarian approach to those markets would seem to be a wiser choice.

If it seems unwise to simple-mindedly take the word of some sage, how can we find seasonal trends by simply examining some historical data? If the average price of a tradeable in one period differs significantly from its price in another period, it is at that point that a seasonal difference is worth talking about.

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