Spreads Trading

[-oo0(GoldTrader)]

I have attached Moore's AugCrude05/Febcrude06 spread to illustrate.

I also choose this spread because frankly it is going T!TS up at the moment.

The 15 yr gives a good average overview of how the spread has performed. The 5 yr gives a good view of how the spread has been changing in character from the longer average in recent years. That is obvious.

The only thing that is obvious to me is that the seasonal chart was right on. The low occurred within a day or two as predicted. Do you see what the “five-year,” is going to have to do in order to “average,” the “fifteen-year,” over the next ten years?

My guess is even though the six-week uptrend starts the first week in April. The reason the window opens were it does is to catch the low, which occurs when the season changed to spring. It is the rise off of this seasonal low, that lets you build up a big position with very little starting capital.

Back to the trade at the moment. Looking at the crude spread it followed the seasonal average very well until the last week of Feb,

It does not matter much what happened in February. That is out of the highly likely area. What matters is what it is doing now, in the seasonal window.

correlation since then it has been in a steady counter seasonal down trend,

I do not see any counter seasonal trend here. This is a tradable spread.

with no logical long entry,

Parobolic turned today.

everything is pointed down, indicators and price action.

The definition of a wash out is everything pointing down. Now we have a trendline break, Parobolic, divergences etc. everything signaling the spring bottom is in on schedule!

common sense are needed.

Common sense in not very common.

 

[-oo0(GoldTrader)]

Convergence and Seasonality

jimbo57 has written me to explain about Convergence

Convergence in commodity spreads is the over-riding principle at work.

Convergence is the principle at work for non-seasonal spreads.

jimbo57 > Seasonal spreads do not display convergence, non-seasonal spreads do.

I guess we have at least two types of spreads represented here. Those converging toward expiration, and those influenced by climatic cycles, and probably some that do both.

Convergence
Jim Sibbett taught me a technique once, I guess it falls under convergence. We were in a bull market. When a reaction against the trend would widen out the spread near its previous limits it would catch our resting orders. We had partial profits when the bull snapped back the next day. The contracts, which settled as cash, would converge upon expiration and give us the benefit of the full spread. The basic principle at work was “jimbo57s convergence.”

Seasonality
Climate is the underlying force behind seasonals. The greatest supply of crops is most likely to be found at harvest. Just before harvest the big grain house traders, with the help of leftover old crops in storage, do everything in their power to drive prices lower so that their bosses can buy the new crop at the lowest prices. Speculators buy when they find this low happening about the same time year after year. Supply later decreases as the hunger of the world incessantly consumes. Reduced supply leads to higher prices.

 

[-oo0(GoldTrader)]

Sheep dip

Long term prevails over short-term cycles.

Thanks FTSE-B and agree with you about this trade. A couple of points
1) Do you think there is a period in the life of the spread where it is more likely to follow the route determined by the 5/15 year chart?

That is the whole point of it isn’t it. That the longer-term trend prevails.

For example your chart uses the June 06 contract. Can this be very liquid in March 05?

You can always find this out by checking the volume. June 06 over 30,000 per day. 1,000 are enough. Besides this is a seasonal be concerned with what the volume will be when you need to get out in two months, not now.

I assume that the yellow highlight is the period MRCI would trade.

This is the period tested to have the highly likely trade. The percentages are for within the yellow area only. Chart patterns and indicators are for the tested area only. We often get seasonal rallies in bear markets.

The 5 year doers seems to correlate better with the 15 year on the lower relative chart during this period.

I see all of this attention on the five year. Look, no trader would even buy these charts if they only had the five-year. Odds are, and of course there is substantial proof. Odds are the 15-year will prevail. Jake has written on this many times.

Moore took all of that into consideration before it selected this spread above thousands of other spreads for the same time period.

You know I've been thinking. I am very enthusiastic about spreads but still can't imagine myself placing a trade. All the reasons are based on actual feasibility of placing trades and the slippage and legging problems.

Look don’t put your life savings in it. Open an account with no more than $3,000.00.

If you can’t win with 3 you can’t win with 30. There is no legging in problems. This is about spreads. If you are legging in you do not have a spread. Just go MOC like everyone else. You can check your fills against the close to see about slippage. Beware NY.

Firstly I wouldn't be very keen converting, say £10K into dollars right not.

Hay $3,000 U.S. What can that cost? Margin on this spread is about $400.00

We might have seen very recent strength in the greenback but the underlying momentum for weakness is still there.

Currencies always fluctuate don’t let that be an excuse for not learning something new. It seems to me your precious pound was worth $25.00 not long ago.

The other thing is that I still don't understand the intermediaries and the contracts themselves.

What are intermediaries?

Which are pit traded, which are electronic?

This does not matter, you are getting off course. Just train your broker what you want to do. What difference does it make what market they choose. That is not your job. Your job is “HOW MANY! Your hired research will tell you what contracts were tested. What markets, what days to get in, what days to get out. You just have to learn not to run “to close of a stop,” unless you like supporting brokers and missing opportunities.

Which are liquid, which aren't so?

Check volume!

Which broker can handle which contracts?

If your clearinghouse cannot handle all of the contracts your research department comes up with. Get another broker.

What are the margins required

I use Jerry’s spread letter. He gives us margins for selected trades.. You can figure out the tick sizes from the charts. However, I don’t know why anyone would want to keep finding time consuming stuff like that. Jerry keeps track of trades in dollars. You just keep in mind your basis vs. the daily spread report.

and tick sizes for each?

I don’t know what good they are but go to Symbols Codes & Contracts. This should cover everything.

Where is the risk of slippage

Depends on the market. Euro$ is the most liquid, NY has the most slippage.

and when is the best time of day to place a trade?

The best time to email your order to your broker is when the markets are no longer open. Place trades MOC. Send them in before the market opens or ten minutes before the close.

I know that Andy Jordan over on ET only uses pit-traded contracts and uses REFCO as a broker. Any comment on their service? Would I just call the guy in London or would I have to speak to someone in Chicago or wherever?

When you are placing an order in Chicago, contact Chicago. Email works fine.

Is my margin safe?

Safe from drawdowns??

There are all kinds of US Government investor protections over here. If you are really worried. The first time you are up 100%, take your original capital out and do it again. I have not heard of anyone with less than $100,000.00 losing from a broker going under. All they have to do is get you to run close stops, and limit your gains to clean you out.

I understand the fundamentals of the FA rules and clients money etc but how does it work in the US?

You put up your funds and you buy your spreads. You can have the gains wired to you.

Can you imagine trying to chase a bankrupt US broker for our margin thru the US courts?

This is the United States everyone is insured. They will delay but you will get a check.

Please understand I don't expect answers to these questions.

Sorry I did not see this post earlier. Good questions deserve answers.

I have to work it out for myself. That said if there are obvious pit-falls and mistakes that could be avoided by an old-hand then this would be appreciated.

Ross’s book is going to send you to the same place. Moore has made it easy to get research and trade spreads. Trade their free sample.

What is clear is that despite many of the MRCI trades being very attractive, many are practically untradable for one, or a combination of the reasons above.

Start with the calendars. That should minimize your concerns.

I suppose, above all, it is the idea of having multiple dollar accounts that worries me most. I suppose I'm just stuck in my spread betting ways. In that game they bend over backwards to lower the barriers to entry. That's because 90%+ lose money. No punters - no profits for them. You must make it easy for the punters to play.

Our barriers are like an initiation a gauntlet. If the small guys play the regulators will tighten the screws.

The flipside of course is that if you are able to learn the ins and outs of the contracts, set up broker accounts and find a trusted broker

Trust no broker.

then this, in itself, provides a barrier to others entering the game. Keeps it slightly out of reach of the undisciplined and easily deterred.

Just a note on discipline. I prefer flexibility, I hate discipline