Current Spreads Journal

Thanks Peter - this is very interesting and, if nothing else, it seems that the fundamentals that underpin MRCI's historic data could be under threat from changes in technology.

I probably shouldn't re-print this here but Jerry says:

QUOTE

Dec/July Soymeal. Commercial activity in soymeal is greatest during the fourth quarter as livestock feeders accumulate inventory of newly crushed supplies. Further, South American producers are typically sold out by then, Thus, strong demand both domestic and foreign drives bull spreads - especially throughout October, when both harvest and processor activity is most intense.

UNQUOTE

However if yields are at all time highs will there be too much supply to drive the Dec contract higher than July? Will all demand be satisfied at lower price levels?

Do you mind saying which contract you have open? December?

GT - care to step in? I'd appreciate your thoughts.

FN
 
Okay - for better or for worse I have entered the following soybean meal spread today:

Buy Dec 05 Soybean Meal(CBOT) / Sell Jul 06 Soybean Meal(CBOT). Order for MOC today. Expecting a fill at arnd -10 or -9.5.

Although there is no sign of an upturn the market's decent has slowed. I will use a fairly close stop with this one. Market has not dropped below -16 in the past 15 years and rarely drops below 11ish. A seasonal life is overdue. Of course the improved technology and subsequent record yields could prevent the Dec contract rallying above the July.

Time will tell. Like I say a close below -11/12 will get me out.

Cheers,

FN
 
fn-
Good luck on the soymeal spread trade. I was thinking of getting into this trade except I didn't like the correlation of this spread that MRCI shows with the spread in 1990 - there is a 90% correlation, which is a very high correlation from what I can tell. If the spread continues to follow it's '90 path, the spread looks to drop to -16 to -17. Nor do I see a 1-2-3 type of formation, or any other pattern that is suggesting a reversal at this time. That's why I'm sitting this particular spread out. If I notice a 1-2-3 pattern ("ross hook") or possibly a crossover of the 20 period ema (using bollinger band) I might decide differently.

Time will tell whether my decision was good or bad.
 
Yep - didn't notice that . . . . like I say - running a close stop. 1994 looks like the wost year to be involved in this spread - it literally nosedived and never recovered.

Hoping for a recovery - ( despite it being written many times over that all hope in trading is futile) - I'll wait and see for now. I'll close out in 7 - 10 days if no sign of life.

Cheers,

FN
 
This discussion board had really ground to a halt. . . . where is everybody? H2O? Jxntntrader? Burble? and especially GT?

What trades are people running? What are you considering? Which trades are people happy to take? I've learnt that New York markets are wild (which GT and H2O could have told me months ago) - agricultural/livestock/eurodollar markets seem to be less volatile.

There's something about currency spreads that puts me off (contract size I think) - ditto for cross market spreads. . . .. doesn't leave a great deal but I'm happy to plod along and build up slow.

Anyone else care to share their feelings/preferences for markets/contracts? Any lessons learnt or tales to tell?

Cheers,

FN
 
Hi FN,

I'm still here, but taking things very slowly. Only started with this spreadbetting lark at the beginning of August. Shortly after starting, the monster that is Greed&Fear reared its ugly head and sank its fangs deep into my rump. It then proceeded to drag me kicking and screaming into the fiery, stomach churning speadbetters hell.

Timing and NOT getting over leveraged seem to important.

So I'm plodding on with my Soya Oil and a bit of gold.
Bought a bit of BHP Billiton on the pullback the other day, only to watch it pull back even further.
It does seem to be recovering now, though I am concerned Wall Street will plummet and take every thing with it.

Peter
 
I'm still in the Kansas Wheat trade. THe Lean Hogs spread trade is going very well. The Eurodollar trade is down about $350-$400.... I'm thinking very seriously of closing this trade out tomorrow - if you look at the MRCI Strategy sheet it appears that all of the drawdowns occured early on - in the first 2 weeks of the optimized entry date (9/2). Plus the chart is showing a break in the "natural support" as Joe Ross puts it.

I entered on Monday a corn spread trade - Short Dec 05, Long July 06... this was based on a high correlation of the spread compared to the year 1979 (94% correlation!) , and also due to the fact that the harvest for corn is expected to be very high.. therefore causing a decrease in the price.. at least that's the thought. So far today it's at -50.


I still would like to hear other people's opinions of correlation studies and their use of them.

Jxntntrader
 
Okay - still in the hogs trade LHG6-LHZ5 and it's still (fingers crossed) going okay and roughly as per seasonal bias.

Soyameal trade SMZ5-SMN6 has been in that dormant phase that makes all traders nervous as it usually precedes a big/spike move. I'm a great believer in waves of high/low volatility. I expect a big move up or down this/next week.

I know I shouldn't look back to see how trades would have turned out had I not been stopped out. It's not something I would usually subject myself to preferring to put a losing trade out of my mind and move on. It's one of the great laws of trading isn't it? Right up there with ''cut your losses and let the winners run''.

But why is this necessarily the best thing to do? Would you not learn something by noting what would have happened had you hung on a few more days/weeks? Why do we prefer not to know?

In my experience the main reason for leaving closed trades well alone is that I am usually disappointed to learn that, had I hung on my position, it would have corrected itself and reduced my losses, let me off the hook at b/e or more commonly turned into a winner. With regular directional trading (ie not spreads)feeding your subconscious these negative messages about the perils of ''cutting losses'' is surely setting yourself up for a big fall.

However - I believe that there is a case to view seasonal spread trades rather differently. This is quite different to my advocating sitting on losing trades. I'm simply trying to explain why I think there could be a case for viewing spread trades through a different lens.

A seasonal trade has a window during which we expect a move to take place. What we don't know is if the seasonal forces responsible for the moves in previous years are still prevalent this year or (if they are) when they will begin to move each leg of the spread. Moore's charts are littered with examples of trades that went against the expected move early in the window before pulling back halfway through (or later).

There is a reason for this early morning ramble. My disastrous crude spread (CLZ5-CLM6) has turned on its heal and spiked in the seasonal direction. +$770 per single spread yesterday alone. Of course I bailed 10 days ago so will not see the benefit of this late come back but it is significant none the less.

The most important point is that this trade is still well inside its seasonal window. (to end Oct). If the recovery continues Moore will put 2005's CLZ5-CLM6 down as a winner and this simple result will ignore completely the turmoil felt by traders who took this trade this year.

Then again this is one trade and there's undoubtedly a real perception bias/filter at work here. Had yesterday's spike been 77 ticks downward would I be writing this now? Should I change my style on the basis of a single trade that would have come good had I not bottled it and pulled the plug. The answer to both questions is surely 'no'.

However it does make think about how I will treat drawdowns and counter seasonal moves in the future. The chances are that the move will happen inside the window. If we begin to expect the move to happen at some point in the window and cut trades that do not meet with these expectations then we are massively reducing the chances of our success.

Once the window is over get out. That's clear. But next time, while the window is still open, I'll think twice before pulling the plug early.

Right - time for some breakfast

Cheers,

FN
 
fn,

good job on the lean hogs trade. I am doing well on that trade as well. The soybean trade appears to be going right along the correlation path. If continues, then expect a continued move down for a few more days and then a turnaround.

As to waiting while the seasonal period is open, I am going through that same thing with my Kansas Wheat trades. RIght now the trade is having some drawdown, and I expect to continue to go lower for a little bit and then turn around. Of course this is pure speculation. I will leave it to others to suggest their remedies on when to pull the plug or when to wait. As for me I am deciding on whether to sell the spread based upon the average drawdown that is shown in the MRCI strategies. I'm certainly open to other people's ideas though as I am a new trader.

Jxntntrader
 
Hi Jxntntrader,

I've been off-air for a few days whilst I move house. I'm pleased about the hog trade and wondering whether to take some profits. Of course this is completely contrary to the thoughts I expressed above and indeed trading wisdom would dictate that taking profits early and giving losers room would almost always end in tears. Joe Ross does advocate taking money out of the market when you can but only when you have multiple positions. He certainly does not recommend letting losers run!!

I'm becoming v nervous about the SM trade - I shall give it another few days before pulling the plug.

Any other trades you are considering? November seems to be packed with high probability seasonals so I might keep my powder dry for then.

Cheers,

FN
 
Hi Jxntntrader,

I wonder if you could expand upon your comment:

''The soybean trade appears to be going right along the correlation path. If continues, then expect a continued move down for a few more days and then a turnaround.''

Where can you find these correlations? How reliable can they be? I would be more convinced if there was a strong correlation AND the fundamentals driving the spread action matched to some degree. Is this the case here? hard to tell.

Do you routinely look for correlations? Have you seen any data on the reliability of correlations of today's spreads with those of previous years?

Interesting idea.

Thanks in advance for any hints. . . .

FN
 
I was assuming you have a subscription to MRCI online at mrci.com. That's the web site for Moore Research. On their web site they have a section entitled "Special Spread Charts". Click on that link and then have the Soymeal spread charts emailed to you. I can't really give you the details or post the chart on this board as it is copyrighted.

As to the reliability of the correlation charts - that was the question I asked in my post on the "September Spreads" thread, but I never got a reply. I believe that Moore Research would tell you that it's just another tool that you can use. How they go about making the chart/study is explained, somewhat, in the introduction section to their spread chart emails. I'm really not able to explain it in much detail.

Again, since I am new to spread trading myself, I cannot give an opinion as to the accuracy of these studies/charts. If the current Kansas Wheat Dec/May spread follows the correlation that is listed in the MRCI material, then I can expect my drawdown to increase a bit for the next week to two weeks and then to reverse. We shall see.

Are you trading using the Moore optimized entry/exit dates, or are you filtering your trades in another way ? I would be interested in knowing.

jxntrader
 
Hi jxntrader,

I do have a subscription to MRCI but had not found (or at least hadn't had a proper look at ) the correlation section until yesterday afternoon. Interesting stuff but I'm still not sure why the price should continue to follow a historical path just because it has done so for some part of a year in question - maybe it's one of the trading rules that no one really seems to understand but just seem to work. . . . . . .

I am guided by MRCI's dates but am not rigidly sticking to them. For example if a chart is nosediving into a seasonal window I won't buy in until I get some confirmation of a bottom. If this means I miss part of the move then so be it. Often it means a much better price can be achieved than MRCI quote.

The opposite is also true: I won't buy into a spread if it looks as thought the move is well underway before entering the seasonal window. I am still very much in the learning phase and have no hard and fast rules. I thought I was so clever buying into the Dec-June crude spread at a bargain discount only to watch it continue to nosedive. When I reviewed the chart (retrospectively of course) it was clear that there was huge momentum to the downside.

You live and learn. For now I'm sticking to same market, same contract, low volatility seasonals (after having my fingers burnt in the NY markets). Euro$, agro and meats seem to be gentler . . . .

It'd be great to swap ideas - how so you filter Moores trades?

Cheers,

FN

PS - Looks like your Euro$ trade is coming back. . .
 
Hello again fn,

I can't really explain how/why the correlation charts work, but again it is a good tool to use nevertheless. The thought is that the fundamentals for the year(s) in which there is a high correlation are similar and therefore the there might be some reason for the spread to act in the same way. At least that's the thought.

As to what my filter is, right now I am trying to stick with Joe Ross' idea in his book Trading Seasonals. His recommendation is to use the ideas in MRCI and if you see a 1-2-3 "ross hook" within a 20-day window of the optimized entry date, then enter the trade. I didn't follow this rule, however in the corn trade, but was "testing" the correlation charts. I'm sticking right now with the same trades that you are - calendar spreads in ags, interest rate products, and meats. Unfortunately for me, the Kansas Wheat trade is not doing very well, nor is the Eurodollar trade. I am waiting on the sidelines for the Soymeal trade that you are in.

I am also looking at the 30 years bond/ 10 year T-notes spread right now, but so far I haven't seen a 1-2-3 formation yet, so I'm sitting back. My next trade will probably be the Apr/Feb Lean hogs trade. I'll probably exit the corn spread tomorrow at a small loss.

I will say that the Soymeal spread has acted more like the correlation chart than the 15 year chart. What are your thoughts ? Again, if there's anyone else who has had experience with the correlation studies/charts by MRCI, your input would be greatly appreciated.

Jxntntrader
 
Current Spreads November

Some changes today -

I decided to take profits om my lean hogs trade (buy Feb 06 sell Dec 05) - my fill was poor on both sides (Sell Feb 6580 Buy Dec 6200 ) out a total of 32 points 12 on buy and 20 on sell side compared with reported close. However I still escaped with a healthy profit which almost made up for my shocking crude trade last month. Overall account looking rosy again.

Opened another hog trade buy april sell feb - this trade will run until mid Jan. Currently at +1.00 and initial target +4.00 then +6.00

I also closed out the July leg of my soybean meal spread Buy SM Z5 Sell SM N6 and sold the May leg instead. According to an email from Joe Ross this trade should make much ground during November.

Time will tell - my initial soybean meal trade was break even. Downward momentum has certainly slowed and there are initial signs of moves upward.

Cheers

FN
 
Hello fn. I entered the Dec./May Soymeal trade on 11/1 myself. This is close to the seasonal time window as outlined in MRCI. Also, the spread correlates well with 1979. Also there is a 1-2-3 formation that occured on that date.

I also entered Jan06/Apr06 Crude Oil spread on 11/3. This trade is based on seasonality as well as a 1-2-3 formation. The april contract however is fairly illiquid so it's hard to get a read on this one just yet. Good correlation on this spread as well (85%) with 1994. I never have seen any replies from any other members regarding their use of MRCI correlation charts. The correlation on my KC Wheat Dec/May spread has veered off recently, with a correlation going from 93 % to 89%. If the spread continues to widen, then I might even make a little money on it.

I sold the Eurodollar spread that I had opened on the day before the Feds raised interest rates. I lost over $600 on that trade. I would've lost about $200 more if I had waited the next day to sell on close. If I had stuck to the original trading plan and sold when the price went below a "natural support level" then I could've limited the loss to about $250 to $300. At this time none of the long term Federal Treasury Bond spreads proposed by MRCI look good so I'm staying out.

Any other trades that you merit interest ?

Jxntntrader
 
Hi jxt - nothing else really - my new favourite contract is hogs and I'm hoping this new trade (described above) will be as successful as the last - weren't you in the same hog trade? You still in? I think there are a few days left before the window closes.

Sorry to hear about the ED trade but congratulations on having the discipline to cut your loss and look for fresh trades. In my mind this is truly the hardest part of the game.

To be honest jxt there is so little activity on this thread that I am rapidly coming to the conclusion that position spread traders are very thin on the ground. There's even less discussion on elitetrader. I'm not surprised at all that there has been no feedback on the success of correlations. It's something we'll have to do ourselves which is no bad thing as the acting of ''doing'' and collecting knowledge yourself almost always leads to a deeper understanding than the anecdotal advice that is so rampant.

There are experienced thread traders that are also regular readers of this thread. Characters such as ERA, H2O and GT (what happened to GT??). Until they decide once again to get involved we should make an extra effort . . . . .

Have a good w/e

FN
 
Hello again fn. I guess we'll have to learn the hard way about the correlation charts. For me, I find myself looking at the correlation chart alot closer than I do the 15 year charts in making my decision to enter or exit a trade. As for the trades that are still open I am down on the 2 KW trades, but I believe that the trade will turn toward profitability as it gets closer to the optimized exit dates. I am still not willing yet to get into a foreign currency spread trade just yet. It seems that most of the recent fx spreads have acted un-seasonably. Also, the margin for those spreads is higher than others so therefore I'm standing on the sidelines for now.

Are you getting the free newsletter from www.spread-trading.com ? If not, I encourage you to sign up as it gives you a few good trade ideas. I'm not looking to get into any new trades right now. I am keeping watch of the LCG6/LEG6 which the optimized entry date of 11/15. If I see a 1-2-3 formation I will probably enter that trade.

Good luck on your trading. Also - I have a feeling that many of the traders who are/were on here email each other about their trades instead of posting them on the bulletin boards. Just my opinion, for what it's worth.

Jxntntrader
 
Hi jxntntrader - agree wholeheartedly with yr opinion about the FX trades. For me there has to be a fairly readily understandable fundamental rationale before I take a trade - this is why agro spreads are more intuitively attractive than FX or bonds etc.

You might have something with the correlation charts although I can't understand why any year in question should act like a historic year? How can you strip the element of randomness from the correlation to view ''real'' correlation which might be based on similar fundamentals etc?

As for email groups - do you belong to any? I wonder whether I might join the distribution? I shall leave it up to you to decide whether this would be well recieved by the other members. . .

So you're looking at the live cattle vs hog trade? Is there reduced margin available? If so it's maybe worth a punt. I'm going to keep my powder dry for the up and coming wheat and ED spreads towards the end of the month.

Let's stay in touch -

FN
 
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