Seasonal profit decay

In the previous section, we talked about how algorithmic trading strategies have many underlying assumptions. Seasonality, which is a concept we covered in one of our chapters, is an assumption that dictates a trading strategy's profitability. For a lot of asset classes, their price moves, volatility, relationships with other asset classes, and expected behavior vary quite predictably. Trading signals and trading strategies need to account for these differences due to seasonal factors and adjust and adapt accordingly; without that, the profitability can vary over time and might not live up to the expected performance. Properly understanding the seasonality factors involved and the impact on the trading strategy performance is important when building and running a long-term algorithmic trading strategy business.

To avoid seasonal profit decay, sophisticated market participants have special trading signals and strategies in place to detect and adapt to seasonal market conditions and relationships between different contracts and trade profitably through all the different seasonal trends. Seasonal profit decay is a normal part of trading strategies that deal with asset classes and/or trading instruments that have seasonal trends in behavior and cross-asset relationships, and it is important to collect large amounts of data and build analytics to understand and manage seasonal trends to maximize profitability.

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