As goes January...
So goes the year.
The January Barometer is a widely discussed hypothesis in trading and investing. It suggests that the performance of speculative assets in January can set the tone for the rest of the year. While it has shown a historical correlation, it is far from a perfect predictor. Understanding this concept is an excellent introduction for new traders to systematic trading, an approach based on historical data and statistical analysis rather than emotions or speculation. Creating simple rules to follow makes this phenomenon actionable.
The January Barometer, developed in 1972 by Yale Hirsch, has gained traction due to its historical success rate. The hypothesis states:
• If January ends positive, the market will likely close the year higher.
• If January ends negative, the market will likely decline for the year.
While this pattern has been around for many years, it is not a foolproof indication, and new traders should use it as a data point rather than a trading signal. Creating some rules-based frameworks can allow for signal generation.
Note the January High.
If February, March, April, May, or June closes above the January high, buy (or open a long position).
Close out on Dec 31.
If no month before July closes over the January high, do nothing.Backtesting the January Barometer against historical data for systematic traders helps validate its predictive power. I’ve traded this for multiple years for BTC and posted this exact trade setup for the last 3 years.
Here is a link to some other backtests. I’ve also created a tradingview indicator to view this strategy independently. The link to that is here as well.
Remember, no single indicator is infallible.
The January Barometer is a primer for data-driven trading. It introduces key concepts of historical pattern analysis, hypothesis testing, and risk management, which are crucial for systematic trading.
By integrating insights from the January Barometer with statistical rigor, traders can make informed decisions rather than relying on market myths.
Side note: The January high for BTC/USD is 109,358.01 on Coinbase.
Fingers crossed for an entry signal!
@ThePrivacySmurf