Trading seasonal patterns in Precious Metals, today: Trading Silver

March 04, 2020 09:30

Today we want to focus on a bearish seasonal pattern in Silver.

Fundamentally, with the outlook of the Fed's probability to keep on flooding markets with liquidity to avoid a funding crisis (especially in the repo market), the general outlook for Silver stays positive, as the Fed Watch Tool points to market participants expecting the Fed to cut rates by 50 basis points with a likelihood of nearly 50% by December 2020. This comes despite the latest remarks from Fed chairman Powell's semi-annual testimony where he stated that the Fed sees the current interest rate level as appropriate.

Interestingly enough, Silver didn't really profit from the favourable market environment so far, compared to its positively correlated pendant Gold, Silver has been relatively weak.

With that in mind, the seasonal bearish window in Silver between March 6 - 16, which developed over the last 16 years, may be of interest for traders looking for a potential bearish trading setup.

Seasonal Pattern in Silver

The key parameter of this seasonal bullish pattern is as follows: between March 6 and March 16, Silver saw an average drop of 0.60 USD for 12 of the past 16 years.

In the remaining four years, it gained on average only 0.20 USD, while the maximum loss was 0.29 USD and the maximum drawdown being 0.56 USD.

Trade the Seasonal Pattern: Silver

And now the key question: how could we trade this?

Here's the plan:

  1. After identifying the profitable seasonal window, we sell Silver on the closing price of the starting date on March 06 (22:59 CET).
  2. 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).
  3. We Look at the average gain of the seasonal pattern, and place the take profit at this distance from your entry point.
  4. 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 March 16.

Looking at current market data, since the ATR(14) in Silver on a daily time frame is currently trading around 0.27 USD, while the maximum loss of the window was 0.29 USD and the max drawdown being 0.56 USD, our worst-case stop will be placed based on the maximal drawdown 0.60 USD away from our entry price.

Meanwhile, the average gain of the seasonal pattern is 0.60 USD within this period. So, after entering the trade on the closing price of March 06, we would subtract 0.60 USD to get our take profit level.

Silver Daily chart

Source: Admiral Markets MT5 with MT5-SE Add-on Silver Daily chart (between November 13, 2018 to February 18, 2020). Accessed: February 18, 2020, at 11:30 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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