By Don Dawson, Online Trading Academy Commodity Futures Instructor

Seasonal Patterns are simply cycles in a Commodity's life that repeat on a consistent basis year after year. This creates opportunities in outright Futures or Spread positions that fall in an optimized window in time. All Commodities are grown, mined, drilled, consumed, produced, etc. These products are based on growing seasons, weather, driving, heating seasons and many other factors affecting supply and demand. Since there are periods when these Commodities are needed by consumers or producers for their business, there are repeating cycles for each of them.

Some examples of Commodity cycles in the table below:

As you can see from these cycles, they stand a very good chance of repeating year after year, perhaps not on the exact same day but within a given window of time each season. It seems Mother Nature has her hand in this to a degree with most Commodities. For example, it would be very difficult for farmers in the Northern Hemisphere to start planting crops in December and expect them to survive the winter weather ahead. Or that the driving season will change for people with the bad road conditions in the winter and also the children still being in school makes it harder to go away on vacations.

By knowing where you are in these Commodity cycles can offer you a huge advantage in selecting your market to trade. By using Seasonal Patterns, we can anticipate future price movement based on historical data going back as much as 15 years or more, instead of being overwhelmed by fundamental news that is often very contradictory.

Once you identify a Seasonal Pattern, you must then decide how you will make profits from it. By following these three steps you should be on the right track to success.

1. Recognizing opportunities
2. Choosing the correct strategy that will work with the opportunity
3. Being able to manage the trade once placed

#1- Recognizing opportunities

By observing our charts and Seasonal Patterns, we can see when a market is poised for a move. We do not know exactly what will cause the market to move but we will have identified a potential trade and will have prepared our strategy to take advantage of this opportunity. The market may be in a trending or sideways environment; we will adjust our strategy for whatever environment we are in. You can always use just your charts to identify these setups; however, the one thing we strive for in trading is to have confidence in our trades. By bringing in Seasonal Patterns with high percentage recurrence rates, this will help you stay with your trades longer and not be shaken out so easily from a winning position.

#2 – Choosing the correct strategy that will work with the opportunity

Once we identify an opportunity we must step up to the plate and have a strategy to implement. This is no time to just talk about your opportunity. As the saying goes, "Walk the Talk and Trade the Trade!" Being that Commodity Futures have so much leverage, it is a good idea to be aware of some alternative trading techniques other than just an outright Futures trade, assuming the market you are watching is rising. Here are some alternative positions:

• Buy the Commodity in the Cash Market and store it
• Buy the Commodity Futures contract (Outright Position)
• Buy the Commodity along with a Put Option (Hedged Position)
• Buy a Call Option on the Commodity Futures
• Spread Trading (simultaneously being long one contract and short another of a related market)

We all know that risk is what we want to control while trading. By choosing one of the above strategies you should find one that fits your risk tolerance. These could be based on market volatility, too.

#3 – Being able to manage the trade once placed

After selecting your trade and strategy, you must then have a plan on how you will manage this trade. Your plan should answer some of the following questions before you enter the trade.

• Is this a swing trade or position trade?
• When does this Seasonal Pattern end?
• What is my exit strategy? (fixed target, trailing stop, etc)
• Will this be an all in, all out trade or enter and exit by scaling your position?
• What is my MAXIMUM loss I will take on this trade? (Put this in writing!)

By now you are probably wondering where you get this Seasonal Pattern information. There are various websites that you can subscribe to for this data, or you could track it yourself, but the time it would take you and possibly errors you could easily make are worth looking for a data provider. I have found one by the name of Moore Research Center, Inc. (MRCI), www.mrci.com. They are a research company that has been around since 1990. They provide Futures traders with historical and seasonal analysis. MRCI has made the job of tracking these Seasonal Patterns much more efficient and profitable with their computer software database. They have offered Online Trading Academy students and readers of Lessons from the Pros a complimentary trial subscription to their service. This website is filled with valuable information for any Futures trader. The contact information is below and they will gladly discuss all the advantages to using these patterns with you, and mention Online Trading Academy for your free trial.

Please contact: Melissa Moore – Operations Manager Melissa@mrci.com or (800) 927-7259

Once you have this information, you will see up to two months of upcoming Seasonal Patterns. This allows plenty of time for trade planning. There is no need to rush your trading. They only list trades with 80% or higher of a Seasonal Pattern reoccurring. With that said, Seasonal Patterns are not perfect! Please do not follow each recommendation blindly thinking that you have a "guaranteed" winning trade. You must tie this in with Technical analysis to time your entry. The key is finding a Seasonal Pattern, then a chart pattern that confirms the Seasonal Pattern and limits your risk.

There are times when the Fundamentals are stronger than any Seasonal or Technical Pattern that we may be aware of. For example, weather can cause major havoc on Seasonal Patterns. Let's say we have a Seasonal Pattern to sell Cotton in the upcoming weeks. We do our homework and find a good Technical level to sell at to confirm our Seasonal Pattern. However, during this time a hurricane comes up the Gulf of Mexico and travels deep inland, causing major flooding, thereby damaging a large portion of the Cotton crop. This will probably cause Cotton Futures to be Limit up (excessive buying) for several days to come. A Seasonal Pattern has no way of predicting this type of event. So even if the Cotton market has sold off 15 of the last 15 years at this time of year, you cannot bet blindly that it will do so again. This is where you must know the other Fundamentals about the market you are going to trade and make sure there are no extreme circumstances going on that may affect your Seasonal Pattern.

This topic will take future writings to expand upon the different ways of using this very useful tool.

"What we do is a measure of who we are. If we imagine our work as labor, we become laborers. If we imagine our work as art, we become artists."

Wishing everyone an "extended" stay on a long trend,

- Don Dawson

DISCLAIMER:
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

Reprints allowed for private reading only, for all else, please obtain permission.