Current Spreads Journal

[jxntntrader]

fn,

Hello again. I see your point about the element of randomness in the correlation charts. However, I see that it can be a useful tool - once again, I would rather hear from someone else who's been around for longer than I have to give an opinion but so far there have been no takers. I will continue to use it as a tool. The correlation studies for my KW trade and my Dec./May Soymeal trade have been fairly accurate. I can say that they appear to be more useful in following than the 15 year chart. Also, in Joe Ross' spread trading newsletter that he sends out every week (for free) he has based some of his suggested trades on correlation charts as well. If you haven't signed up for it yet, I would suggest taking a look at it - it's at www.spread-trading.com. Put your email address in the place where it says "sign up for free newsletter." It's free so there's nothing to lose. I haven't taken them up on any of their other services.

As for an email distribution group, I am not in any. That was just a gut feeling I had based on some of the prior posts.

As for any new trades - I am staying out of the Live Cattle/Lean Hogs trade so far as the trend momentum is down for the moment. However, I did put on a trade yesterday - Long Mar06 Treasury Bond/ Short Mar06 Treasury Note. This trade was based on seasonality (it's still within the MRCI seasonal window) and based on a 1-2-3 formation. We'll see how it does.

I am hesitant right now to try my hand at the coming ED spread trade that comes later this month after having just been burned on the last ED trade. Knowing my luck that trade will end up doing very well. Keep up the posts and let me know how you are doing.
Jxntntrader

 

[fastnet]

Complete schoolboy error today. . . . . completelty forgot about expiry of Dec soybean meal contracts as part of my DEC - MAY spread. Both legs are well in positive terrartory so could have been a lot worse - let's call it a shot across my bows. . . .

Hogs trade still running splendidly - I will most likely pyramid in again tomorrow.

Anyone any thoughts on the up and coming ED trade Sept 06 - sept 08?

GT - you still there?

Cheers

FN

 

[fastnet]

Current Spreads December

Okay - all sorted with the broker. I'm out of the Dec/May SM position at 170.3/174.1 and very useful profit. Also profited from a lesson learned to keep a closer eye on expiry dates!!

Looking to open another Long April short Feb hog trade at the close today.

Cheers

FN

 

[fastnet]

After closing out my soybean meal trade I was left with only my hog spread . .

I have now increased my position in lean hogs buying in at MOC yesterday Buy April LH 6880 and sell Feb LH 6620 spread 2.68 target here is +4 and beyond by the end of the third week in jan

I have also opened a Eurodollar spread buy sept 06 sell sept 08: 9510.5 - 9507 spread 0.035 target here is 0.15 initially then 0.3 by first week of Feb

 

[jxntntrader]

fn - i also got into a second spread on feb/apr lean hogs as well. I am also in the live cattle/lean hogs as well and so far i'm up about $600. I exited the crude oil spread on friday for a profit of about $1,100 (i started the spread on the first day at +$450 - see earlier post). So far so good. The crude oil profit made up for the losses on the ed and the kw trades.

I am sitting on the sidelines right now on the new ed spread. For one, I am still smarting on the ed trade before that. Also, the correlation studies for the ed spreads do not look like the typical 15 year seasonal pattern. So I've decided to hold back for now.

Jxntntrader

 

[jxntntrader]

fn

Good luck on the ED trade. (See my post on the November spread trades thread). I have also entered on Friday a separate spread trade - Long July KW / Short May KW. The basis for this is seasonal (see MRCI report on KW - it's free) and a 1-2-3 formation has formed. I hope this trade does better than the earlier KW trade.

Jxntntrader

 

[fastnet]

Hi Jxntntrader,

How are things going? That live cattle - lean hogs trade you took on is still going great guns - fantastic trade. Was it tipped on MRCI? I couldn't see it.

Meanwhile the momentum seems to have dropped on the lean hog spread although a lot of last week's lost ground was made up on Friday. You still in?

My ED trade was off to an unspectacular start until Friday when it dropped suddenly out of it's recent tight trading range - not a good sign - I'll give it a few more days rope but, without improvement, will cap losses mid-week.

I'm also keeping a close eye on the April live cattle - live feeder cattle - waiting for the 1-2-3 to give me some confidence that the bottom has been reached and I'll get in. . . . any thoughts?

Happy Christmas if I don't hear from you before the end of next week -

FN

 

[jxntntrader]

fn-
hello again. I got in on the lean hogs spread trade on 12/2. I am up $60 on that part of the trade - I had entered this same spread earlier.

I entered the live cattle/feeder cattle spread on 12/14 and so far am up $65. I am also up $100 on my KW spread trade that I referred to earlier. I also entered a wh6/wn6 spread on 12/13 - it stands at even money right now.

All would be good news except that I entered an unleaded gas trade - long feb06/ short may06 on 12/05. Because of the illiquidity of the May contract I was about -$600 when the spread opened. Interesting side note - I went to www.tradingeducators.com and chatted with Joe Ross last Tuesday nite ( 12/13/05). You should download and read the transcript when it becomes available as I asked him about the correlation studies. Also, I mentioned my experience on this unleaded gas trade and his response was that he completely avoids the New York markets. Interesting comment - read it if you get a chance. I am now down about $900 on the unleaded spread and will probably exit tomorrow depending on how the market looks during the day.

Merry Christmas and keep in touch,

Jxntrader

 

[fastnet]

Okay - thanks for the tip - sorry to hear about the UG trade - I was also bitten badly by crazy fills when entering and exiting my crude trade. In neither case did I benefit from these fills. . . . . it makes me very suspicious to be honest. Roll on direct access and electronic markets for ALL futures. There's simply no need for people to be stepping in between market participant and market anymore. What's more I have found the majority of brokers to be unhelpful, aloof and sniffy about small orders. Maybe I need to switch firms?

What happened to your live cattle lean hog trade? Are you still in?

I'll be watching to enter the LC/FC trade today. . . . . .

Cheers,

FN

 

[fastnet]

Hi Jxntntrader,

What do you make of that hogs chart?? Looking pretty weak eh? Does that look like a top or a pause to you? Not thinking of pulling out completely but I might well lighten up at close of play today (Thurs).

Any thoughts?

ED U6-U8 also v weak . . . . . .

 

[fastnet]

Right - out of one hog spread MOC last night - bought Feb LH @ 65.35 and sold April LH @ 67.45

One spread left open but this hog trade looking WEAK. . . . . . . saying that I am only used to technically evaluating single direction charts - I have been trying for weeks to get my head around whether using TA with spread charts has any validity at all. After all a spread chart is a derivative of two separate charts, one for each leg. As such how can TA be meaningfully applied to a spread chart?

Of course people DO apply TA to spread charts but this might be more to with the fact that visually they are indistinguishable from regular single contract directional charts.

If a single contract is in an established up or down trend (however this is judged) then you can be sure that the contract is making successively higher highs and lower lows or vica versa. If it's range bound then this is plain to see direct from the chart. Simple. (well relatively)

However if a spread chart is trending higher it could be any one of:

a) the long and short contracts are steadily diverging - ie both legs making money
b) the long is shooting up at a faster pace than the short - ie long making more money than short is losing
c) it could also mean that the short is plummeting and the long also decreasing but at a slower rate - ie short making more cash than long is losing

Either way the spread trader, using only the spread chart, just sees the same steadily rising spread chart. . .

So, you might ask, where's the problem.

I see the problem as a lack of visibility regarding what is actually going on. One of my trading principles is to look for an exit (or to lighten up a position) whenever I see the chart increasing or decreasing at progressively steeper angle (roughly >60 degrees although I judge by eye) - this is very often indicative of a blow-off or exhaustion move after which there is a good chance of significant retracement.

If I were to ONLY look at the spread chart I could be oblivious of this exhaustion, high prob retracement, taking place in one of the legs. This would be especially the case if the opposite leg was acting to negate much of the benefit that the spread posn would otherwise have received from such a rapid climb. (is this making any sense??)

So, for example, base case is both legs of a spread diverging steadily (ie long steady increase and short steady decrease) producing a steady uptrend in the spread chart. However over the course of the next trading week the uptrend in the long position become much steeper culminating in a breakaway gap move at the end of the week which would usually indicate an exhaustion move. However - whilst this was going on the short position stopped its steady and profitable decline and began to steadily increase - turning this leg into a losing position which NEGATED the dramatic rise in the long position - all the hapless spread trader saw from the beginning to the end of the week was a steadily increasing spread chart which cheered them up going into the weekend.

However probability would suggest that the long position is due for a sharp correction. This will have a large effect on the spread chart especially is it is accompanied by a continued or increased loss in the short position.

Anyway - I hope this is making sense.

So - how can we build this realisation into better management of spread trades? What I have started to so is to not only scrutinise the spread chart for steady trends/ resistance etc but to look BEHIND the spread chart at the charts of both legs. Is either leg making an extreme move? WHY is the spread chart acting the way it is - are these a combination of leg charts that look balanced and steady?

MRCI makes light work of this analysis by providing charts of the spread AND each leg within their summary page.

Any comments? Is this a useful discussion or am I barking up the wrong tree entirely?

Cheers

 

[jxntntrader]

fn,

woops...sorry, i thought i had responded to your message after mine. The lc/fc trade so far is only going so-so. Actually, I'm down about $170. Also, the lh trade is also down. However, based on the 15 year charts I expect this to happen. I have decided only to get out of a trade when I'm in negative territory only when it hits a certain dollar stop point. Or, I will look at the 15 year profit history numbers and may stop out if I am close to the end of the optimized exit date. I don't really look too much at the chart except to look for a 1-2-3 entry point. Looking at the charts too much for me leads to conflicting choices and can get more confusing than helpful. I do keep up with fundamental news to try and determine, if possible, why a spread is not acting seasonably.

I have stayed out of the Euro$ spreads so far. I wonder if those spreads will begin to act seasonally again once the Feds stop raising rates. I am staying on the sidelines so far.

Have a merry christmas and please continue to post your thoughts. Also, I am in the wn06/wh06 spread right now..I hope to see it move soon.

Jxntrader

 

[fastnet]

Phew - looks as though the hog trade could be back on track - I'm sort of regretting liquidating my position now but, then again, it was the prudent thing to do at the time. Besides, if I were to increase my exposure to hogs I'd now go for the July - Oct trade.

Gave an order to liquidate my eurodollar spread today - just lost confidence in it really . . . . .

Jxn, I'm looking to get into the buy live cattle sell feeder cattle trade but am a little confused how to enter this order. Would I simply buy 5 x LC and sell 4 x FC to have a true spread?

I'd appreciate any advice

tks, fn

 

[fastnet]

Okay - last post of the year. I've been thinking about the LC-FC spread between turkey sandwiches and entertaining relatives . . . . .

To have an even position in both legs I'd have to buy 9 contracts altogether: 5 x LC and 4 x FC. The total trade would cost me $15 x 9 = $141 in commission rather than the usual $30 ($15 round trip each leg. However there would be no greater profit potential (each log cancelling the other out). However IF my broker made a mistake in entering or exiting the spread (which so far happens 30-40% of the time) my potential exposure could be huge. I wouldn't like to be have 4 unhedged FC contracts at $2000/unit move for any length of time. I am also unsure whether CME

Can anyone advise? Is there another way to enter this trade than by opening 9 contracts?

Happy New Year all -

FN

 

[-oo0(GoldTrader)]

Answers

Jxntntrader>spread and will probably exit tomorrow depending on how the market looks during the day.

Interesting comment. How do you check simultaneous trades during the day? The only reliable spread quote is the close.

Fastnet>After all a spread chart is a derivative of two separate charts.

A chart is a reflection of human nature. TA tries to filter out the underlying forces behind the moves. When you are charting both legs, how do you know which signal, when both are occurring simultaneously will give the greater bounce or fall?

If one is a buy and the other is a sell, as can happen in SM/SM, no problem. But look at the charts. Both legs usually turn at the same time. How can you even out the effects that uneven volume and unbalanced O.I. may have on prices?

The seasonal pattern is as valid as any other kind of chart. If you want to play with individual legs as a start, you have to use 15 years of data to compare it to a 15-year seasonal.

Either way the spread trader, using only the spread chart, just sees the same steadily rising spread chart. . .

Who cares about that? At a time like that all a spread trader sees is raising profits!

I see the problem as a lack of visibility regarding what is actually going on

What is going on is the price found by the market to balance the forces of supply and demand for “the spread!”

oblivious of this exhaustion, high prob retracement, taking place in one of the legs

Maybe if you are legging in and out. Of course when you are uncovered you are not actually in a spread.

However probability would suggest that the long position is due for a sharp correction.

Probabilities sounds like gambling, guessing. Is this information not included in the 15-year pattern?

What I have started to so is to not only scrutinize the spread chart for steady trends/ resistance etc but to look BEHIND the spread chart at the charts of both legs. Is either leg making an extreme move? WHY is the spread chart acting the way it is - are these a combination of leg charts that look balanced and steady?

Excellent!

You have to understand that is a 15-year study. You can’t isolate just one year and compare it to the 15 years. Did it happen this way in each of the years? Five years? Two years etc?

I have decided only to get out of a trade when I'm in negative territory only when it hits a certain dollar stop point. Or, I will look at the 15 year profit history numbers and may stop out if I am close to the end of the optimized exit date

Compare it to parabolic, if you can beat Parabolic in the direction of the seasonal you may be on to something. Always look at a chart before making a trade.

Is there another way to enter this trade than by opening 9 contracts?

MOC takes care of this. You are not legging in. You will get filled. You can check to see how close your fills are to the published price. Send the order by email and do not accept anything else but what you ordered into your account.

 

[Kato]

Lc J6 - Fc J6

Hi Fastnet

MRCI show this trade (strategy number 2579) as an equity spread i.e. (LC current price x $400) - (FC current price x $500) so to trade the chart they show you would enter an equal number of contracts on each side.
Hope this helps & all the best for the new year.

Regards
Kato

 

[fastnet]

Happy New Year everyone!

Kato - so I could enter this spread with one LC contract and one FC contract entered as a spread?

Don't you have to balance the unit move dollar values? Does this mean that even though a unit move in FC is $500 it is 1/5th less volatile than LC so that a move in one will be balanced (in dollar terms) by a move in the other?

If the volatility were the same any gain from my LC long would be more than cancelled out by losses in my FC short.

If I can enter one single spread then this helps a great deal and I shall do so on Monday. . . . .

Tks for the help -

FN

 

[TWI]

With a spread like that I think that you probably have to consider volatility just as much as unit dollar values. It is not one I look at. Can you not give your broker a limit order on the spread and let them work it for you? This is certainly better than you trying to leg it via 2-3 other people.

 

[Kato]

Lc J6 - Fc J6

If you entered long one LC contract and short one FC contract you will be trading the strategy presented by MRCI.
I would let MRCI worry about balacing the volatility between the contracts and just rely on them having found a high probabilty seasonal move trading the even contract spread
Rather than balancing the unit move dollar values, by multiplying out (current price x unit move $value) you are overcoming the problem of different tick values by exposing the underlying changes in open equity and showing the true profit/loss for the trade e.g. if both contracts moved up $1 the change in price differential would be zero but there would be a change to the trade's open equity of $100.
There is a better explanation of the above on MRCI's help pages under 'Equity spread trading info'!

 

[-oo0(GoldTrader)]

Sources

Where did you learn this?

entered as a spread?

No, you do not enter it as a spread.