The Bad, The Good, And The Profitable by John L. Momsen
Here’s why you have to research your trades as thoroughly
In February 2003, I received an intriguing email
from one of my friends. He said he had discovered
a nearly perfect, 94% profitable, seasonal
trade in the orange juice market and wanted my
opinion on it. This certainly piqued my interest:
I’ve been a trader of seasonal commodity trades for more than 20 years, and I’ve written both books and
articles on the subject. So what was this seasonal trade? “Buy
May orange juice on the close of February 26 and exit the
trade on the close of March 17.”
My friend wanted my opinion, so I needed to analyze the
trade. My original excitement was diluted when I found out
the seasonal had only been studied for the last 17 years.
Orange juice has been trading a lot longer than that, and I
believe strongly in using the greatest amount of data available
to test any seasonal trade.
Second, the relative short time period of the trade bothered
me. In my experience, few seasonal trades that last less than
a month end up being profitable. Often, they are just mathematical
chance happenings that occur when an entry day
price is lower than the exit day’s price. These trades are
mostly computer-generated and are rarely true seasonals.