Trading, bias, and seasonality: how much do you know?

Did you know that markets, like us, have their own personalities and trends? These trends can be daily, weekly, monthly, or even yearly—what we call seasonality.

While you might already be aware that these patterns can be leveraged in trading, do you know how to pinpoint and validate them to get the best results?

In today’s video, we’re revealing the secrets behind market biases and seasonality. Don't miss it!

Enjoy the video!

Transcription

Introduction and Definition of Bias and Seasonality

When it comes to developing strategies, we inevitably discuss biases and seasonality—concepts well-known but not necessarily familiar to all aspiring traders.

So, here we are. In this video, we'll explain what these terms mean, their differences, and how to use this information to create our trading strategies.

I'm one of the coaches at Unger Academy and let's start with some theory.

First, what do we mean by biases and seasonality?

Simply put, these terms refer to repetitive market behavior. In other words, some markets tend to move up or down during certain periods with consistent patterns indicating the stability of the bias or seasonality.

Another important thing to know is that biases can vary depending on the period considered. For example, there are daily biases, where we analyze this repetitive movement within a single session.

Weekly biases, where we look at patterns over several days, not just one.
Monthly biases, analyzing trends within a month.
And lastly, annual biases, often called "seasonality." And of course, in this case, we look at the average trend over a year.

From this last type of bias, we see there’s not much difference between biases and seasonality. The only difference is simply the time frame considered.

How to Identify Bias and Seasonality: Example on Copper Futures

Now that we've covered some theory, let's get practical and see how to extract this information.

To do this, we'll use Bias Finder, a software we developed at Unger Academy to help us study biases and seasonality.

What you see now is the Bias Finder software. Let's make an example of how it works by loading data on Copper futures from 2010 to today.

As you can see, here on the right, we can analyze various biases or seasonality patterns. For this video, let's analyze the daily bias.

Once the data is loaded, we can see the average trend over a day since right now, we are focusing on the daily bias.

You’ll notice that this future typically peaks around one o'clock (exchange time) and hits a low around eight o'clock (exchange time). This information can be incredibly useful. But first, let me ask: do you think this daily bias has always been like this over the years? The answer can also be found in the Bias Finder.

How to Validate Bias and Seasonality

In fact, we can divide the entire period and compare different phases, for example, from 2010 to 2013, from 2014 to 2017, and from 2018 to 2021.

By doing this, we see the overall average, which is represented by the blue line, and other lines that represent the selected periods. In this case, the bias has been quite consistent during all the periods considered. This is a great piece of information confirming the stability of this trend.

Using Bias and Seasonality as Triggers

However, our work doesn't end here because, so far, we've only collected data. Next, we’ll use MultiCharts to backtest what could be the foundation for a trading strategy.

Here you see I've written two lines of code, nothing complicated, where I open a long position at 8:00 o’clock and then open a short position at one o’clock.

The times are 15 minutes earlier because the strategy works on a 15-minute time frame. So, since I enter the position on the next market bar, if it’s at 7:45, I will enter the position at 8:00, and the same for one o'clock. Anyway, I’ve already loaded the strategy onto the chart, and let's have a look at the performance.

As you can see from the equity line, we have a curve that grows consistently. So, the analysis done on Bias Finder is accurate. The problem arises when we look at the strategy's average trade.

Using Bias and Seasonality as Filters

Currently, the average trade of the basic strategy we’ve just created isn’t large enough to cover trading costs. That’s why it's crucial to refine this strategy further. Remember, it’s just two lines of code for now.

So, in summary, we’ve seen that we can use biases and seasonality as triggers. However, this isn’t the only way to use this information. In fact, we can also use biases as operational filters. Let me explain by taking the seasonality of the S&P 500 futures as an example.

In this chart from the Bias Finder, we see the annual average excursion of this future and notice how September is statistically a negative month.

Let’s suppose we develop a classic trend-following or mean-reverting strategy. In that case, it might make sense to avoid going long in September since the results will likely be poor. Or we could decide to go short in September due to the negative trend.

Useful Tips, Diversification, and Monitoring

Alright! So, with this video, I wanted to show you how useful it is to have objective data to rely on. But I must conclude by reminding you that, so far, we have only done a historical analysis, and even biases and seasonality can change over time.

That's why it's important to monitor these trends and diversify our portfolio, avoiding relying on a single strategy.

But that's all for today. If you are interested in content like this or software like Bias Finder, you can book a free consultation at the first link below.
And we'll see you in the next video!

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