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12/29/14

Seasonal Futures Spreads, How to Trade them

What is a seasonal futures spread?

First, I will start explaining what a futures spread is. It is as simple as the difference between two futures contracts. We will have to choose a couple of futures contracts highly correlated. In order to be highly correlated, these futures contracts relationship must have an economic sense.

To make a futures spread, we would never select a Japanese Yen futures together with a Coffee future. This spread has not got an economic meaning.

An example of a spread formed with highly correlated futures contracts is this Feeder Cattle calendar spread, GF April-May 2015:


Now, let´s include Seasonality in the futures spreads game. Many of the futures spreads move similarly in different years.

Why? Because every year, similar conditions occur.

Agricultural products events take place in the same months every year. Planting, emerging, heading, maturing and harvesting are events that happen continuosly every year. Futures spreads measure the way these events are behaving the actual year. If we include a comparation with other years´ same spreads, we can analyze the seasonality.

In the next Crude Oil spread chart, seasonality of the last six years is represented as a black line. The actual 2015 spread (blue line) is following the bearish historical seasonality:


Another example about seasonality is consumer habits. Every year, summer barbacues occur. And demand for meat products grows during summer months.

We can also find seasonality in forex futures when foreign companies need to buy or sell a given currency to repatriate their profits during the same months every year.

Energy futures also have strong seasonal behaviors. Gasoline demand is higher during the summer (driving season) while heating oil´s demand is higher during winter.

The following chart shows a Gasoline calendar spread Aug-Sep 2015:




So, how can we trade the different seasonal spreads cited?

I usually search spreads that are behaving this year in the same way that its seasonality. This fact will add success probabilities to our trading. If this year´s conditions are similar to average conditions, spreads should behave the same way.

Before entering into a spread position, I recommend to check price action in the spread´s chart. If the spread´s chart price action is favorable to the seasonal pattern, we will have more chances on our side.

I use basic technical analysis tools: pullbacks in trends, head and shoulders formations, 123 patterns...

Another tip for trading seasonal futures spreads is choosing a spread wich is not very close to the actual moment. I prefer to have more room for the spread to move, in case it does not work at the begining of the trade.

All seasonal charts in this article have been prepared with: Scarr Visual Trading

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