Prices in certain markets often affected by seasons. Prices are based on supply and demand, and both supply and demand for assets change based on the year. This is known as Seasonality. As a result, each will perform best or worst depending on the time of the year.
Reading Seasonality charts is fairly simple. Your horizontal axis is the months in the year. It starts in January and ends in December. The Vertical axis is the price of the asset over time. The chart displays an average price over the time period chosen by the user. In this case, we’ve chosen the last 20 years.
The Red line represents the average price over the time period. The blue line represents prices this year. In this case, you can see a clear divergence between these two lines, due to economic factors (specifically OPEC/Non-OPEC competition) in the oil markets from 2015 to 2017.
Reading and interpreting the chart requires some background knowledge. For example, the demand for gasoline rises during the summer due to heightened rates of transportation. Increased usage of transportation vehicles results in a heightened need for fuel. Increased seasonal demand, or reduced supply, increases asset prices. Increased seasonal demand, or reduced supply, decreases asset prices. If entering a marketplace, review annual prices by weeks, months, or quarters. This should be done for an extended period of time in the asset’s pricing history.
How would this normally work? In a typical scenario where prices are expected to trail seasonality, you would have a disposition towards buying during the lower priced months, and a bias towards shorting during in the top end of the seasonality curve. This would result in fairly consistent profits, if it followed its averages. Of course, nothing is as clean in the real world, and disruptions result in divergences from the average often.
The above image is the seasonality of Wheat futures.
This is the seasonality of Natural Gas.
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