The summer period is often characterized by low volumes and at times lower volatility in the stock, cryptocurrency, and commodities market. This is because many market players sell their assets in May to resume after the summer.
But is Summer really such a terrible time? We believe not. For day traders even this period can be an excellent opportunity to generate profits.
In this article, we will look at some of the best approaches to use when trading during the summer season.
Seasonality in stocks
The financial market is open throughout the year. However, a closer look at the market shows that there is volatility at certain times of the year. For example, there is usually volatility in early January, April, July, and in October as companies publish their earnings.
In May, there tends to be some volatility because of tax reasons while in January, the volatility happens as large investors position themselves for the year.
Another important concept in stocks trading happens in summer when many large investors go for vacation. This is evidenced by the relatively low volume in stocks and often, low volatility. So, how do you trade during summer?
Have a watchlist
In a previous article, we looked at the importance of having a watchlist. This is a document that highlights the top movers and the reasons behind the movements. We also looked at the need to identify pre-market gainers and losers.
The main benefit of a watchlist is that it will tell you what is happening in the financial market and why. For example, if Apple shares are up by more than 10% in premarket, the watchlist will tell you more about the price action.
In addition to a watchlist, you can use platforms like Investing.com and Market Chameleon to identify top movers in the stock market. Ideally, as a trader, you will make most of your money when you deal with shares showing a high degree of volatility.
In line with the first point, you should always look forward to companies with catalysts. A catalyst refers to something that is moving a stock. Fortunately, catalysts don’t respect seasons of the year and they often happen during the summer months.
Some of the popular catalysts in the stock market are:
- Earnings - Many companies publish their quarterly results during the summer season. These results tend to lead to significant market movements.
- Mergers and acquisitions - Companies announce M&A deals throughout the year. In many cases, companies will publish their M&A deal in the summer, which leads to volatility in their shares.
- Management changes - Stocks tends to have high volatility when a company announces changes in its management or board. For example, the shares could decline when a popular CEO announces his resignation.
- Social media - In 2021, social media became a key part of the trading season. At the time, shares of companies like GameStop and AMC soared as traders using social media invested in them.
- Deliveries - Automakers like Tesla and Nio announce their deliveries every month. These numbers tend to lead to volatility.
While volatility usually fall in summer, there are many opportunities that emerge that can help you make a substantial amount of money.
Sectors with catalysts
Another thing to consider when trading stocks during summer is company sectors. As you already know, there are several sectors in the financial market. These include consumer staples, consumer discretionary, technology, electric vehicles, energy, hospitality, and finance, among others.
Some sectors do relatively well during the summer period. For example, in the summer of 2021, attention will be on sectors like energy and finance. Energy stocks will be watched closely because of the rising oil prices and potential demand as the global economy reopens.
Similarly, finance stocks are expected to be volatile as the market starts pricing in higher interest rates in the market. This situation will be different in years to come. The key is to look for sectors that have a catalyst behind them.
This point also applies to other industries in the financial market.
For example, the cryptocurrency sector shows volatility all year round because of how global it is and the nature of traders. Unlike in stocks, most participants in the cryptocurrency industry are retail trader from around the world. Therefore, most of them keep trading even during summer.
Technical and price action analysis
Another thing to keep in mind during summer is that the principles of technical and price action analysis are always in play. Technical analysis is the process of using indicators like moving averages and the Relative Strength Index (RSI) to identify potential entry and exit points. In simple, it is a process of using mathematical calculations to find market moves.
On the other hand, price action is the process of trading based on the chart action. Some of the popular price action things to watch are patterns like:
Therefore, when you look at these patterns well, it will be relatively easy for you to make money throughout the year.
It is often said that investors should sell in May and go away. While this is a trading strategy that can work for investors, we wrote that it is not a good idea for day traders because of the many opportunities that emerge. I
n this article, we have looked at several strategies to use when making money during the summer season. In summary, ensure that you look for a catalyst, identify sectors making large moves, and embrace the role of technical and price action analysis.
External Useful Resources
- Should You Take a Break from Trading in The Summer - Trading Education