Market Cycles: How to Get the Most Out of The Market
While not all widely talked about, these are the most important market cycles I’ve observed over the past 5+ years.
Market Cycles to Take Note Of
January (Weeks 1 and 2) – New Year! Everyone begins with a clean slate and fresh start (that is assuming you’re not carrying any positions over from the previous year).
Things are slow to start off as traders return from holiday and get back into the swing of things. There’s no reason to go all in just yet, lots of year ahead. This is often when we are the most patient and disciplined. Try and develop a routine to take you through each week.
February to April – The second week in January things begin to pickup and traders resume in full force. These first 4 months of the year are where a lot of money is made.
For the swing trader, this is a great time to test the waters and get a feel for which sectors are active.
Some of the Market Wizards talk about only trading the first third of the year and taking the rest of the year off. Just goes to show how much opportunity there is at this time.
Memorial Day to Labor Day – The U.S. Memorial Day holiday marks the start of summer for most. The saying “sell in May and go away” signifies the summer slowdown and with kids off school, family vacations on the calendar, and plenty of fun to be had, this is typically the slowest time of the year.
Slow does not mean however. a lack of trading opportunities. I’ve found the summer months to be less volatile, but just as (if not more) technical.
September to November – The latter half of the year for the big traders and institutions is all about continuing where they left off. Volume and volatility will typically pickup at this time. The past couple years it’s been the week following Labor Day weekend.
This is also an important time of the year because a longer term trend will emerge. This trend is sometimes the resumption of the Spring trend so I will sometimes break the year into 3 segments, Spring, Summer, and Fall.
Winter Holidays – Up until the week before Christmas the markets tend to stay pretty active. The exclusion here would be the week of Thanksgiving as once again, traders going on holiday.
Many traders and hedge funds use the week before Christmas to close out positions, starting the New Year fresh. I always end flat at the end of the year; that includes my swing trades. The only positions I carry over fall within my long-term brokerage and IRA accounts. The time between Christmas and New Years is basically dry as a bone with hardly any trading taking place.
Light Volume Days
These are days in particular which see lighter than normal volume, which for the intraday trader making for a lousy trading environment.
- First week of January
- Fridays before 3 day weekends (Memorial Day, Labor Day)
- Week of 4th of July
- Friday after Thanksgiving
- Week between Christmas day and New Years day
There are certain holidays in which the stock market is closed, but the futures markets are open. I do not trade these days.
The Best Times to Trade
Regardless of the cycles above, I’ve found the best time to trade is when the Volatility Index (VIX) is between 25 and 35. It doesn’t matter what time of the year it is, this market environment seems to provide the best intraday trading opportunities.
I become more aggressive and active when the market is trading between VIX 25 to 35 while avoiding the light volume days and keeping in mind the market cycles,
The Worst Times to Trade
For some reason there is one month in the year that always seems to be lousy, August. I am not sure why exactly, but the past few years there just haven’t been as many quality setups on the ES and 6E in August as compared to the rest of the year. Watch out for August!
Futures rollover can be a bit tricky as well. If you’re not familiar with how futures rollover works I have a video in the webinar archive which outlines how I trade and manage my positions during this time.
On a day to day basis, Mon and Fri tend to be a bit lighter trade than during the middle of the week Tues-Thurs. Keep this in mind as you go about your week. There’s no need to get overly excited on Monday or try and be a hero on Friday. I taper my trading on Friday into the weekend. The bulk of my intraday trading occurs in the middle of the week.
Certain news announcements can also play a part in the speed of trade. I tend to avoid trading FOMC Meeting Announcement days, but the day following has repeatedly been fantastic for trading.
Keeping detailed notes is very helpful in uncovering patterns such as these through the year and across multiple years. This is how I draw a lot of my observations and conclusions.
Patience pays, so be selective with your trades. There’s no harm in sitting on the sidelines for a period of time if the market is not conducive to your setups at that moment. This will keep you in the markets during the good times, and get you out of the markets during the bad times.
Follow the big players. There’s no sense in trading futures on a market holiday when all of the big traders and institutions are off. Try to avoid the days talked about above.
Oh and one more thing, NO Trading on Vacation! I mean it. It will only pose a distraction. Any gains you make will be offset with aggravation from your family, girlfriend, spouse, or friends accompanying you.
A vacation is for relaxing. Use this time to clear your head. This is the perfect way to recharge your batteries and help prevent burnout.
What other challenges have you faced in your trading? Share them below and I’ll respond.