Chapter 6 introduced prices as a time series and identified its four components as the trend, the seasonal pattern, the cycle, and chance (random) movement; it included various ways of finding the trend using statistical analysis and forecasting techniques. Chapter 7 then showed various ways to calculate trends. Of all techniques, the trend is overwhelmingly the most popular foundation for trading systems. In this and the next chapter we turn our attention to two other principal components, the seasonal and cyclic movements.
Seasonality is a cycle that occurs yearly. It is most often associated with the planting and harvesting of crops, which can directly affect the feeding and marketing of livestock. Normally, prices are higher when a product is not as readily available, or when there is a greater demand relative to the supply, as often occurs with food or heating oil during the winter months and electricity during mid-summer. For grain, the season is dominated by planting, harvest, and weather-related events that occur in between. Most crops have been produced in the northern hemisphere, but South American soybeans and orange juice have become a significant factor since the early 1980s, as have Australian and New Zealand beef and lamb, resulting in a structural change in seasonal patterns. Globalization has not only affected financial markets, but nearly everything we purchase.
Consumer habits can cause a seasonal pattern in metals and stocks as weather ...