27 Oct TheHalloween Effect
The Halloween effect is a theory which postulates that stocks perform better during the winter months of October 31st through to the 1st of May rather than the way in which they perform between May and October. There are reasons why this is so, hence the need for investors to seek for the right time to invest in equities.
There are practical evidences which prove that the Halloween effect is very important and this is borne out of the fact that trading in stocks is naturally strategic. The Halloween trading strategy is more effective and result-oriented in that it persistently beats the buy and hold strategy.
According to history, the Halloween trading strategy which began from the 1930s was determined on a stock market variance. It is a common belief that avoiding stocks in May of every year was a practice that emanated from the United Kingdom where wealthy individuals and professional businessmen would leave the UK for other summer vacations in other locations, thereby abandoning their investments. The practice is however still being applied at present.
Halloween strategy can also mean ‘’trade in the month of May and walk away’’. Just like I mentioned above, it actually talks about the six months that is between the 1st of May and 31st October. Within this period, most investors stay away from buying and selling equities.
People who normally orchestrate this trading strategy are the professional traders and not investors. in this article, we shall be looking at some factors that are responsibletfor the Halloween effect.
The Cause of Halloween Effect
Available data reveal that stock trading in several countries normally experiences a low turnover between May and October. It is however widely believed by most speculators that investors who normally embark on summer break contribute to market liquidity at that period of time.
They also claim that these investors who embark on summer vacations do arrive in their large numbers when these stocks have fallen. Therefore, investing in such stocks at this time will largely guarantee higher profit margins due to the lower trade volume.
There are several theories that support different perceptions regarding the Halloween strategy. No matter the number of perceptions and views from people, there will certainly be a theory that agrees with their claims.
The Halloween trading strategy is so intriguing and attractive because it appears to be mysterious. Even when trading is not done consistently, it offers amazing returns to investors.
What The Halloween Indicator Says
Another significant theory most people hold about the stock trading strategy is the Halloween Indicator. In this case, the popular trading strategy which means; ’’trade in the month of May and walks away’’, rightly indicates that stocks offer the best turnover when it is traded between November and April. Both the Halloween indicator and the Halloween effect are seriously raising concerns among investors on which trading strategy is more valid or whether it offers more deceits than pleasure.
To provide answers to this question, a research was carried out by Ben Jacobsen and Sven Bouman in 1973, the result revealed that the turnover rates in November to April period are higher than trading between the months of May and October.
With this result, however, the Halloween effect became stronger in the developed market than in it is in the undeveloped market.
Well, this may not be a satisfying result because the business of this sort is not stable and therefore, it cannot be predicted. In addition, most investors do not have the ability to implement a timing strategy in order to make a robust profit. The trading pattern requires continuous strategy due to its empirical anomaly.
Conclusively, it is ideal to state that when it comes to determining equity distributions, investors should focus on the basics. The truth is that returns on investment can be either high or low at any given time of the year, except you are aware of the time when there will be losses or profit. The general expectation is usually predicated on luck.
As an investor, you just have to be a good gambler. Just concentrate on the core basics of the trade and be consistent, regardless of the times and seasons that go with it.