Trading seasonal patterns in precious metals, today: Silver
Today, we want to take a look at a bullish seasonal pattern in Silver.
Fundamentally, with the expectation that the Fed is to keep flooding markets with liquidity to avoid a funding crisis especially in the repo market, the general outlook for Silver stays positive.
This is especially true as the Fed Watch Tool is now assuming that market participants are expecting, with a likelihood of over 60%, that the Fed will cut rates by 50 basis points by December 2020, despite the latest Fed dot plot signalling no interest-rate changes in 2020.
And then there are also the recent developments in the Middle East with tensions between the US and Iran, where in response, Silver showed a profit from a broad risk-off mode.
With that in mind, this seasonal bullish window in Silver falls between the January 13 through February 5, and developed over the last 16 years, and puts the advantage in the precious metal on the long-side and delivers a potential trading setup.
The Seasonal Pattern in Silver
The key parameter of this seasonal bullish pattern is: between January 13 and February 5, Silver had an average gain of 1.104 USD for 13 of the past 16 years.
In the remaining three years, it dropped on average only 0.52 USD, while the maximum loss and the maximum drawdown were 0.753 USD.
Trade the Seasonal Pattern: Silver
And now the key question: how could we trade this?
Here's the plan:
- After identifying the profitable seasonal window, we buy Silver on the closing price of the starting date on January 13 (22:59 CET).
- We identify the maximum loss within the seasonal period. Then, have a look at the daily chart and the ATR(14) indicator.
- If the maximum loss is above the ATR(14) reading, round it up to the next round number and use it as worst-case-stop.
- If the maximum loss is below the ATR(14) reading, use the ATR(14) as your stop-width (rounded up to the next round number).
- We Look at the average gain of the seasonal pattern, and place the take profit at this distance from your entry point.
- If the trade is not stopped out or it does not reach its take profit within the seasonal period, end the trade market on the closing price on February 05.
Looking at current market data, since the ATR(14) in Silver on a daily time frame is currently trading around 0.26 USD, while the maximum loss of the window was 0.753 USD, our worst-case stop will be placed based on a maximum loss 0.75 USD away from our entry price.
Meanwhile, the average gain of the seasonal pattern is 1.104 USD within this period. So, after entering the trade on the closing price of January 13, we would add 1.104 USD to get our take profit level.
Source: Admiral Markets MT5 with MT5-SE Add-on Silver Daily chart (between September 28, 2018, to January 03, 2020). Accessed: January 3, 2020, at 12:20 GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of Silver fell by 12.8%, in 2016, it increased by 13.0%, in 2017, it increased by 6.4%, in 2018, it fell by 10.0%, in 2019, it increased by 12.6%, meaning that after five years, it was up by 4.9%.
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