Current Spreads – September

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Current Spreads – September

This time of year I see ending the Euro$ spreads. Building up positions in grains, and some years hogs. What do you have for us this month?

Saturday morning and a few minutes to update the ''rookie spread trader'' threads. . . .

The last couple of days have been fairly active. Of the five positions I have had open in the last couple of months all are now closed out except for one.

I've learnt many lessons through actually placing and closing out trades. I've made mistakes in both trade selection and broker instruction. I have also been treated unfairly by my broker but appealed and been vindicated. In my opinion there really is not substitute for opening an account and placing a few trades. I'm no high roller - far from it. All my positions (bar one) have consisted of just two contracts (one spread) - one buy, one sell. I have not pushed the margin limits of my account preferring to build a base of experience and take things easy at first.

Towards the end of next week I'm going on holiday and (rightly or wrongly) prefer to lighten up open positions before heading off. I'll be far from an internet connection and prefer to be free from the thoughts of daily market movements. There'll be time to get stuck in again when I return.

In mid August I reconsidered both my Corn and Soybean trades. Both were treading water and the corn trade had suffered dreadful drawdowns but since recovered. I closed out soybean first. (SU5-SX5)The seasonal window for this trade had closed without my noticing - a lesson learnt. This was a scratch trade and the profit covered commission.

The corn trade (CH6-CZ5) was slightly different. There was still time for this trade to evolve. In fact since I closed out the spread has moved in what would have been a favourable direction. However the drawdowns in late July had put the wind up me and the position was going no where when I closed it out. It also transpired that I has chosen the wrong trade and there was much more movement in CH6-CU5 or Sept for the sell side rather than December. Another lesson learnt. 3 cents profit which easily covered the commission but was nothing to write home about.

In mid August I bought a Eurodollar spread on a seasonal basis. EDZ5-EDU5. This trade moved up and quickly took me into profit at which point I added another contract. Of course this trade then drifted and, last Friday, dropped taking me into a loss position. Last Monday I had decided to sell one of the contracts and wait hope the remaining contract would resume the seasonal move. However during Monday afternoon (UK time) the spread began to close and I decide to stick with it. Tues, Wed, Thurs saw dramatic action. The spread moved quicker than it has in months and narrowed from -0.32 to -0.12. With two contracts this represented a 20% gain in my account and I decided to take profits. This was by far my most successful trade to date.

Other trades include a wheat trade (KWZ5-KWN6). Again this trade was placed expecting a seasonal move. However confusion with trade placement got me onto a Chicago rather than Kansas wheat trade. This was broker error and I received some compensation. However, once they'd closed out the Chicago position my originally intended Kansas trade had move away from me. Instead of the entry at -7 I got in at -4. This represented a profit foregone of $150. This experience left me quite bitter and I felt fobbed off by my broker. They really made me feel like the little guy I am in terms of account size. I exited this position a week later a realised a profit of 5 cents or $250.

Finally there was the crude spread (CLZ5-CLM6) which I am now regretting. This trade was moving into its seasonal window after a long downtrend. It looked as though a bottom was in place and the downtrend line was broken. I bought in at 0.25. Within 24 hours this trade had moved up to 0.64 and made $390. Easy money right? Wrong. The following week saw steep drop offs and my profit melted and position eventually moved into a loss. The downtrend still appears to be in place and my trade is still open. The market closed yesterday at -0.2 giving me a paper loss of $450. The worse recent close was -0.36 giving me a paper loss of $610. This contract is MUCH more volatile than I realised and I now want out. Looking for an exit next week. I hope (a bad word in trading!!) that a new bottom is not formed.

So there we are. One scratch trade, one small profit, one decent profit, one great profit and one open losing trade which could take the whole lot with it!!

Cheers

FN

good stuff fastnet - seems like youre doing well and learning quickly. you seem to be taking it steady too and within your limits which is good. never try to run before you can walk!!

im currently in gedu6-u5. doing nicely!! i will probably get out on on the 12th - a few days before the window closes and before the u5 expires.

how much are you paying per contract round turn? do they offer a special pricing structure for spreads?

Hi CC - yeah it's going okay. However what isn'y clear from my post is that each trade suffered draw-downs to some degree before coming back. In the case of Soybean and Corn the max drawdowns were more than the eventual profit.

What I'm trying to say is that although 4/5 trades turned out either flat or in profit this is not necessarily due to skill or judgement. I made like an ostrich when the the corn trade collapsed when I should have covered and taken the loss immediately. Here is my flaw that I share with 95% of trades. It is psychologically extremely difficult to take a loss - especially a big one and especially when the seasonal forces should (and easily could) turn the trade around in a couple of days.

Good luck with yr ED trade.

I'm paying $15 prt with usual reduced margin for seasonal spreads thru the same exchange.

What else are you looking at? There're lumber and a Live Cattle spreads which I fancy but the poor liquidity of these markets puts me off. Any thoughts? Also Heating oil but New York markets are notoriously volatile (as I've found with the CL spread!).

Tks, FN

well at least you know where your weakness is so you can do something about it - so youre half way there!

probably too early to tell at the moment - but do you think your timing technique around the seasonal window is ok? having said this, dont be put off because a few trades have gone against you...
.
1/ spreads are a longer term trend following technique (as you know), so some drawdown could be acceptable, unlike for example a day trade where you want to see momentum kick off straight away. mark ritchie (big spreader in the soy complex - in one of the market wizard books) remarks that most traders arent willing to let positions go against them much, which is why in his OPINION (for what its worth ???), most fail.

of course, you gotta have your stop-out though and when hit...... just make sure its not too tight for a longer term position (why GT uses Par SAR??)

2/ as we know, there is random distribution between wins and losses, so dont get too discouraged. most newbies throw in the towel after 4 losses in a row we are told, and then the pain tells them something must be wrong and they start to change their plan they spent the last x months working at. all that work for nothing, just as the next few trades would have made piles!

you seem to be on a good rate there for your probable number of r/t's. well done. good brokerage is important though, and theres more to it than low costs.

i only trade electronic futures at the moment - so im mostly doing ed's. most of my trading is day trading, with the odd spread in ed. thinking of doing more though when ive made some more money to open another account.....

anyone read this new spreads book?

http://www.amazon.com/exec/obidos/t...bs_b_2_1/103-1930756-8276660?v=glance&s=books

Thanks CC - some useful points which are east to lose sight of.

I'll have a look at Mark Ritchie's chapter again tonight - I didn't realise he was a spread trader although that term did not exist in my consciousness when I first read the Wizard books several years ago.

As for the book you mentioned i have already received it from Amazon. Heavy going to be honest but I'll reserve judgement until I've had time to give it a proper read (holiday next week maybe?)

Cheers,

FN

SChap's Guide

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Thanks CC, I have “Schap’s Complete Guide to Spread Trading on order now!

charliechan said:

anyone read this new spreads book?

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Euro$ success

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All my positions (bar one) have consisted of just two contracts (one spread) - one buy, one sell. I have not pushed the margin limits of my account preferring to build a base of experience and take things easy at first.

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Excellent money management.

(Euro$) With two contracts this represented a 20% gain in my account and I decided to take profits. This was by far my most successful trade to date.

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What did you say your return on margin was on that Euro$ trade?

The crude spread.. Looking for an exit next week.

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The general idea is to keep your winners and get rid of your losers.

Other trades include a wheat trade .. realized a profit of .. $250.

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Two hundred and fifty percent on margin, not to shabby. About 13,000% annualized. You might want to build a bigger position in this spread next summer, to take you through fall.

It looks to me like you did great! Have a nice vacation.

fastnet said:

Thanks CC - some useful points which are east to lose sight of.

I'll have a look at Mark Ritchie's chapter again tonight - I didn't realise he was a spread trader although that term did not exist in my consciousness when I first read the Wizard books several years ago.

As for the book you mentioned i have already received it from Amazon. Heavy going to be honest but I'll reserve judgement until I've had time to give it a proper read (holiday next week maybe?)

Cheers,

FN

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im not too sure if ritchie talks much about spreading in market wizards. i only know because he covers it in his book 'god in the pits' his auto biography. the book mostly deals with his search for religious meaning and truth - only a few chapters are about trading.

You're absolutely right GT - in return on margin terms the ED spread blows other trading/investment vehicles out of the water - I achieved ROM of 200%+.

Of course there's a malevolent flip-side to such leverage (and especially using open equity as margin). . . . . I'm taking things slow for a while, making a few trades and learning stacks!

The one demon I am yet to slay let's me hold on to losing positions - he tells me to ''give 'em room'' as they slip further into the red. The behaviour is only reinforced when - as they often do - these losers turn into winners. . . .

There must be a middle way. . . . one that will allow losing positions to be revived but also signal a clear exit when enough is enough. The search continues. . .

Cheers,

FN

charliechan said:

good stuff fastnet - seems like youre doing well and learning quickly. you seem to be taking it steady too and within your limits which is good. never try to run before you can walk!!

im currently in gedu6-u5. doing nicely!! i will probably get out on on the 12th - a few days before the window closes and before the u5 expires.

how much are you paying per contract round turn? do they offer a special pricing structure for spreads?

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BTW CC - what does gedu6-u5 mean? Or shoud I say: what does the ''g'' stand for? Green? But I thought ''green'' EDs were two years deferred and ''red'' just one year? I could easily be mistaken - still new to this game etc etc.

Cheers, FN

Anyone fancy discussing pros/cons of up-and-coming spreads?

I might try and stake my claim to EDU5-EDZ5 before I go away. There shouldn't be enough volatility to worry about a single contract for a week. . . . famous last words.

Also watching the March 06 - Dec 05 Heating Oil spread but those NY markets make me nervous with their crazy volatility (see crude spread above!). GT did warn me. . . .

Anyone any other ideas - there are a few wheat (Chicago/Kansas cross) spreads coming up. I still prefer same contract different months.

Thanks, FN

ged is the clearing symbol for eurodollars on globex. ed is the pit symbol.

im thinking of getting out of that spread tonight now - i dont think its behaving according to the seasonal pattern too well!

not 100% yet - i'll take another look at the seasonal chart first, and decide neared to the close. dont look good though. should still make money on the trade however. i was thinking this last night - after the massive move we saw last week, we were looking at windfall profits. often its a good idea to take these profits when they are there as markets often retrace as the rangebound locals try to get there money back from the commercials who pushed the market higher.

i can always get back in when the trend reasserts itself. i dont mind giving up a few ticks to be safe, especially as I am not sure as to whats going on at the mo'

fastnet said:

Anyone fancy discussing pros/cons of up-and-coming spreads?

I might try and stake my claim to EDU5-EDZ5 before I go away. There shouldn't be enough volatility to worry about a single contract for a week. . . . famous last words.

Also watching the March 06 - Dec 05 Heating Oil spread but those NY markets make me nervous with their crazy volatility (see crude spread above!). GT did warn me. . . .

Anyone any other ideas - there are a few wheat (Chicago/Kansas cross) spreads coming up. I still prefer same contract different months.

Thanks, FN

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id stay out.

take some time off and enjoy that profit.

the markets will always be there when you get back.

after some deliberation - i'll stay in!!

the seasonal is still there, and as i said earlier, sometimes it pays to keep a stop back a little on a longer term trade. i will only exit if my entry is threatened.

one of the advantages of trading multiple positions is that you can scale out if not 100%, so that is what i am going to do - take half off tonight, to guarantee some profit. as i said earlier, i can always put it back on if the trend reasserts itself.

if my entry is threatened then im outa there!

Euro$

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Update on the chart.

charliechan said:

if the trend reasserts itself.

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Back from holiday now and sniffing around for my next trade.

All closed except for that pesky crude spread CLZ5-CLM6 which is still in a hole and could easy get worse. Joe Ross indicated a similar trade last week: Nov 05 - Jan 06 Crude. Different expiry months I know but if this trade worked out then mine would stand a good chance of scrapping back to b/e. Even with the original trade that I took (Dec05-June 06) we are still in the seasonal window and the decent seems to have lost momentum some what.

There seems very little else out there . . . . . I'll be looking to get into the Feb 06 - Dec 05 Lean Hogs trade today or tomorrow - 15 years of positive returns. No certainties but at least you have probability on your side.

Anyone else any ideas?

Foresight

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You cannot drive forward by looking in the rear view mirror.

fastnet said:

There seems very little else out there

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What about KCBT Wheat. It seems to be following its pattern?

. . . . . I'll be looking to get into the Feb 06 - Dec 05 Lean Hogs trade today or tomorrow - 15 years of positive returns.

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Here is what concerns me about Hogs. Are you sure that this years fundamentals are in place. One of the filters I have found to be very successful is having someone like Jerry, confirm that the fundamentals are OK. Of course he could do that on Friday. The thing is his not having brought up hogs earlier this summer and not saying a thing last week is cause for concern.

What effect has the river flooding had on hogs?

How have they been affected by the temporary rise in crude oil rates?

What has been the continuing effect of mad cows on Hogs, etc?

Hogs bring in a lot of gains partially because the contract size is equal to twice or three times many other calendar spreads sizes. Moore gives us about four spreads a week, Jerry knocks that down to two. Some of those are repeaters, why do you suppose that he didn't recommend hogs last week.

No certainties but at least you have probability on your side.

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Maybe so, how does the chart look?

Hmmm - noted all yours GT . . . . it's too late now the orders placed. Maybe I have been hasty - time will tell.

Or maybe I HAVE been hasty and time will tell whether there'll be a happy ending or not.

Chart looks fine with a bottom in place where it should be and the market off lows going into the seasonal window.

You're right that even one contract can do quite a bit of damage. We'll see what happens next week.

Thanks

FN

PS - agree wheat trade also looks like a very healthy choice -

Right - decided to bite the bullet y'day and take the loss on my crude spread. My account took quite a hit but the CLZ5-CLM6 contract is still locked in a downtrend with no sign of breaking out to the upside. During the past few weeks the drops have become larger and the retracements weaker. Maybe symptoms of the dying downtrend but I'm not willing to risk it. I should have been out WEEKS ago.

Like a run-o-the-mill dumb ass trader I let my loss run and have now given back all the gains made on my Euro$, Kansas Wheat and Corn trades.

I have learnt a many lessons including:

i) Leave NY markets alone for now - very volatile and fills are v unpredictable -
ii) Have a clear and indisputable point at which you're going to get out and stick to it.

Looking back I am not sure that the signal to get in when I did was strong enough. In luxurious hindsight that spread was already locked into a downtrend when I bought in.

My Hog trade is still open and showing a small profit.

FN