Halloween strategy suggests a time frame for investors to use

Author: Forex Live | Category: Education

Getting to know the Halloween strategy

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Halloween strategy definition

Halloween strategy is a term in trading and investments wherein there is an assumption that stocks perform better in the Halloween season. It is a strategy where investors sell their securities during May and then lie low until November due to the assumption that these stocks will provide a higher profit between November and April. In short, this strategy suggests timing when investing.

The opposite of this idea is the buy and hold strategy, where an investor lies low for months and gets a long-term investment.

A little history on the Halloween strategy

From 1694 until 1776, stock analysts and stockbrokers from privileged classes in England went to London to attend summer classes. They left their estates unattended. And since they were away, they did not actively manage their portfolios. So now, the stock market started to decline.

This occurrence paved the way for the Halloween strategy's start. The investors should sell their securities in May then leave. From the previous example, the strategy suggests that it is not good to invest from May until October. In short, the best time to invest is between November to April. In these six months, if you invest, you can get a higher return.

A study supporting the Halloween strategy

Ben Jacobsen and Sven Bouman's paper from the America economics review that studied November to April stock performance gave birth to the name Halloween indicator. The paper says that investors who invest fully for six months (November to April) reap the best returns every year. However, this is only half exposure compared to investors who trade all year.

Pros and cons of the Halloween strategy 

Several studies say that it is best to invest between November and April since there is a better chance for higher gains. Investors can restructure their portfolios in November, and they can avoid more significant risks when investing.

On the other hand, there might be certain advantages in this strategy, but there is also a downside. One is unforeseen risks due to the market fluctuation, and there is no guarantee that the gains will go high like what the strategy suggests. Investors who consider this strategy might miss significant opportunities that would give them higher returns.

There are pros and cons of the Halloween strategy when it comes to trading and investments. After all, it's just a strategy, and it will always be up to the investor which method will be in use.

To sum it up

In stock history, it is evident that the Halloween strategy can be useful as the last half-century shows that the months between November and April gave investors more capital gains compared to other months of the year. Also, investors who sell in May beat the market more than 80% when used for five years and 90% when used for ten years.

Some investors use this strategy because of experience. On the other hand, some do not consider this strategy because they might miss great opportunities. It will always depend on an investor's discretion, and experiences may differ from one investor to another. The stock market will forever remain unpredictable and volatile.
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