Not all seasonal patterns are created equal. The ones worth trading meet three critical criteria:
- The fundamental driver persists (e.g., harvest cycles)
- The pattern shows up in the data – for instance, it has recurred in >70% of years historically
- Commercial hedging activity amplifies the pattern
Based on these criteria, here are some seasonal trades worth looking at:
Low-probability patterns that you should avoid come from transient factors like speculative positioning or isolated weather events. Coffee’s inconsistent Q4 rallies are a perfect example – despite harvest cycles, they don’t appear with enough regularity to be reliably tradable.
And don’t even think about blindly mining for seasonal patterns without thinking about the fundamental drivers – you’ll just turn up stuff that happened to look good in the past that has almost no chance of making money in the future.
How to Actually Trade This Stuff
Okay, so you’ve identified a high-probability seasonal pattern. How do you actually trade it without getting your face ripped off?
Of course, the answer lies in sizing your positions appropriately.
But you can also consider trading a calendar spread rather than taking an outright long or short position.
Instead of shorting corn during harvest season (and potentially getting steamrolled if something goes wrong), sell December corn and buy July corn during September-October.
This spread approach lets you isolate the seasonal component while neutralizing broader market moves.
ETF Investors
If futures trading isn’t your thing, sector ETF rotation works too. Consider shifting allocations between commodity sector ETFs 4-6 weeks before seasonal windows open. For example, move into WEAT or CORN for grains pre-harvest or UGA for gasoline pre-summer (just watch those fees and roll costs).
The key is timing – you sometimes need to front-run the seasonal patterns by several weeks since ETF flows often anticipate the actual physical market changes.
Risk Management: Don’t Get Blown Up
Seasonal trading looks easy on paper. But in reality, it’s remarkably easy to get destroyed if you don’t manage risk properly.
You need protection against three specific hazards:
1. Being Wrong
You’ll be wrong a lot when you trade seasonality. Accept the variance of this return source and size accordingly.
2. Event Shock Vulnerability
Seasonal patterns tend to break during periods of extreme market stress. If volatility spikes, you should cut size anyway, but this might also be a decent trigger to exit your seasonal trades altogether.
During the 2020 COVID crash, nearly every seasonal relationship temporarily broke down. Those who had volatility filters sidestepped massive losses.
3. Carry Cost Decay
In contango markets (where future prices are higher than spot), the cost of rolling futures contracts can eat you alive. During these periods, options might make more sense than futures – long calls for upside with capped carry costs.
Implementing With a Small Account
Most of you probably don’t have the $100K+ that would traditionally be needed for commodities trading. Good news – there are ways to adapt seasonal strategies for smaller accounts:
Instrument Selection
- Use micro futures contracts that require much smaller margins (but beware of limited liquidity)
- Consider platforms with integrated seasonal charts or learn to build your own.
- ETF alternatives like CORN or WEAT provide seasonal exposure without futures complexity, though they have high expense ratios
Position Sizing
Don’t try to trade every seasonal pattern. Small accounts need concentration:
- Allocate 3-5% capital per trade
- Focus on 2-3 high-conviction seasonal plays quarterly
- Scale position size to volatility (position size = account risk % / (entry price – stop price))
Execution Timing
Front-run institutional flows by entering 2-3 weeks before historical seasonal start dates. Use limit orders 0.5-1% below spot price to improve entries.
But here’s the reality: small accounts face serious disadvantages in seasonal trading:
- You can’t diversify across 20+ commodities like institutions
- Micro-futures incur 20-30% higher fees per notional dollar traded
- ETFs face bid-ask spreads up to 0.8% during seasonal windows
- You lack access to premium data sources like satellite crop imagery
You can mitigate these issues by combining seasonal positions with negatively correlated assets (e.g., long gold ETFs during equity-seasonal weakness) and using free alternatives to premium data: NOAA weather forecasts, EIA/USDA reports, and Commitment of Traders data.
The Psychological Reality Check
Here’s something nobody tells beginners about seasonal trading: it requires extraordinary psychological resilience.
Backtests show only 40-50% win rates even in robust patterns, with 3-5 consecutive losses occurring in 30% of years. That means you’ll frequently look wrong and feel frustrated – unless you have an appropriate appreciation for the mayhem of the markets.
I’ve seen many traders abandon seasonal strategies right before they would have worked, all because they couldn’t handle the psychological pressure of being temporarily wrong.
The best way to deal with this is to come in with the right expectations.
Avoiding Data Snooping Traps
I alluded to this already, but let’s make it more tangible.
It’s frighteningly easy to find seasonal patterns that worked perfectly in the past but will fail miserably going forward. To avoid these data snooping traps:
- Have a good economic reason for the trade to exist
- Don’t blindly data mine for seasonality
- Test patterns across multiple commodities and eras (if it worked in the 1990s, does it still work in the 2020s?)
The most dangerous words in seasonal trading are “this time it’s different”. Usually, it’s not different – the pattern is just noisy, and you’re seeing the noise rather than the signal.
Portfolio Benefits Beyond Direct Returns
One often-overlooked benefit of commodity seasonality strategies: they provide unique portfolio diversification during equity stress.
Gold’s Q4 strength and grain’s Q2 rallies showed negative correlation to the S&P 500 during 7 of 10 recent bear markets. This “crisis alpha” makes seasonal commodities trading valuable even when the raw returns don’t look spectacular.
In practical terms, a 10-15% portfolio allocation to seasonal commodity strategies can significantly reduce drawdowns during equity bear markets.
New Frontiers in Seasonality
While traditional commodity seasonalities have been studied to death, emerging markets offer fresh opportunities:
Carbon Futures
EU carbon allowances (EUA) show repeatable May/June strength as utilities hedge annual compliance needs.
Cryptocommodities
Bitcoin futures exhibit 15-20% Q4 rallies linked to tax-loss harvesting rebounds and institutional year-end rebalancing. This pattern has shown up in 6 of the last 7 years.
Regional Power Markets
ERCOT (Texas) electricity futures spike predictably during July-August cooling demand, with 30-40% average moves. Most retail traders don’t even know these markets exist, creating opportunity – if you can get access.
Putting It All Together
Commodity seasonality’s effectiveness depends entirely on how you use it.
The patterns exist because of immutable physical constraints – crops need growth cycles, energy demand follows temperature shifts, and storage limitations create cyclical supply gluts. Despite market evolution, focused implementation on high-probability windows can still deliver decent annualized excess returns over buy-and-hold.
For independent traders, I recommend starting with simple seasonal effects that you can easily understand.
The greatest value comes when you combine seasonal strategies with other systematic edges – they’re often uncorrelated, making it a powerful portfolio construction tool rather than isolated speculation.
Seasonal trading isn’t easy money. It’s messy, noisy, and psychologically challenging. But for those willing to embrace its probabilistic nature and implement with discipline, it remains one of the few edges available to independent traders in an increasingly efficient market landscape.