As the year is coming to an end, it is the best time to start planning your trading approach for 2021. There are many factors to consider and doing it well in advance will give you time to think it through and prepare. This is also the time when you may consider seasonal changes as well as major events that might influence the market. We have compiled a list of factors you might want to consider when picking assets and planning your trading approach for the foreseeable future.
December and January are historically the most successful months of the year, while the months of September and October show the worst overall performance. Seasonal patterns are hard to explain, but supply and demand are seasonally affected in most, if not all, industries. Noticing this and planning your approach accordingly may not just improve it, but also give you a better understanding of the market.
The January Effect
The January Effect refers to a seasonal raise of the stock prices that can be noticed in the beginning of the year. The reason for this is the increase in purchasing of the stocks, that follows the usual drop of prices in December. The drop in prices, among other reasons, is caused by the sell-off from investors, pursuing tax-loss harvesting. The January price increase may also be connected with investor psychology: many traders believe that it is the best month to purchase stocks and begin their investment plan for the year.
Although one could attempt to take advantage of this phenomenon, it is important to note that many traders know about this effect and time their deals accordingly. This might diminish the January Effect on the market or nullify it completely.
Distribution of the COVID-19 vaccine
It is not long until the COVID-19 vaccine will finally be distributed. With the access to the vaccine, the uncertainty is expected to decrease and the economy — to gradually recover from the damage. Though the forecasts differ from one economist to another, many of them agree that 2021 is expected to be a favorable year for S&P500, for example.
Still, it is crucial to recognize that part of the vaccine-related optimist has already settled in and had its effect on the market. When choosing the assets to invest in, it might be a good idea to evaluate their past performance and consider a risk management strategy in case your prediction does not get fulfilled. However, it is important to remember that past performance is not a 100% indication for future performance.
2021 is scheduled to host most of the major events that were cancelled in 2020 — the 2020 Summer Olympics, UEFA Euro 2020, Eurovision contest and Expo 2020. While the events are still far from now, you may mark them in your trading calendar and check the assets that could possibly be affected by these events or their further postponement.
Keeping track of the main events, holidays and seasonal changes throughout the year might be a useful addition to your current trading approach. This may allow you to gain more perspective when entering new deals and time them more appropriately. Add the above mentioned factors to your trading calendar and get ready for 2021!