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Should Octobers’ Reputation As Disastrous Territory Affect Your E-Mini Trading Strategy?

The press has begun their annual warnings and speculating that October is a perilous month for e-mini trading. They tend to dredge up the October 1987 market crash as proof positive of impending doom. Yes, the drumbeats of financial ruin and economic disaster are pounding with impressive regularity based upon that devastating week in October 1987.. But, are these warnings based in fact or an example of “news creation” of dubious accuracy? Let’s look at history to assess October’s performance in the years after the 1987 and relate it to potential issues in e-mini trading, specifically day trading and e-mini scalping.

From the onset I must state my belief that catastrophic events in the past are not a heavily weighted variable in e-mini trading strategy. On the other hand, to summarily dismiss any risk in October would be reckless and counterproductive in my e-mini trading strategy. Benoit Mandelbrot’s “The Misbehavior of Markets’ seminal book, and his discussion of “long tail” events are proof positive that any constellation of variables can produce unexpected trading movement; the hundreds of variables in discovery of market price are difficult to analyze and usually go undetected (or properly interpreted) as market crashes have routinely surprised and confounded both economists and traders with their randomness and scope. Since the commodities and futures exchange tends to produce higher levels of volatility than the NYSE, which I attribute to exponentially higher levels of leverage, you would anticipate the price volatility expressed more profoundly in the price movement on the CME and other futures exchanges.

With my personal bias on the table, let’s have a look at yearly results in the Dow Index to determine if October has been a risky month to trade. In results that can be found on the insightful “Seeking Alpha” blog and data from Dow Jones, here are the facts:

· In the last five years, the Dow has advanced four of the years, not declined

· In the last ten years, the Dow has advanced six of the years, not declined

· In the last fifteen years, the Dow has advanced eleven of the years, not declined

· In the past 15 years, the Dow has advanced at an average of 1.76% in October.

Source: Dow Jones and Seeking Alpha blog

There was only one year (2008) in the past that saw a significant a drop in price levels. In that year the Dow experienced a drop of 14.06%; I would characterize that number as the result of the banking/credit crisis and not attribute it specifically to October in particular, as the previous data has shown that October has not been an overly dangerous month for e-mini trading. The data confirms that in the past fifteen years October has not been a perilous month, or even statistically relevant month for dangerous trading conditions.

In summary, I don’t consider October as a challenging month to trade in relation to other months of the year; in fact, the data would suggest that October may be a good month for e-mini trading. Still, that October 1987 event remains a psychological barrier for traders and apparently is far from forgotten. As always, best of luck in your trading…

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