Spreads Trading

[fastnet]

Thanks ERA -

Finished my lunch . . . . . and found these courtesy of JR himself. Some of the position sizes are frightening . . . any reason why spreads wouldn't work with a mini contract? (coward)

http://lfgfutures.com/backtool/margins.htm

http://www.tradingeducators.com/resources/futures_contracts_specs.htm

www.tradingeducators.com/resources/allowableorders.htm

FN

 

[Beach Runner]

A useful chart on liquidity, ERA. Thanks.

I was surprised to see the S&P in third place for relative contract liquidity, but that's just my ignorance. A note on Eurodollar: for the implied spreads on globex it's just the first three years. You need (I think) to leg into any spreads further back if trading on globex.

 

[-oo0(GoldTrader)]

Oatman Wisdom

If your order is entered as a spread, the price is irrelevant. You're only concerned with the diff.

Oatman is 100% right about this and it bears repeating.

Place your spread orders MOC. Market-on-close. The floor will not know what you are doing. You can look at any screen anywhere and see about where you get filled. During the day thay can take any size slice out of you that they want without your knowing about it. No proof!!

Trading Eod, MOC you can look at the prices and your statement to get on your broker about slippage.

If you are in a six or eight week seasonal trend, timing does not matter much where you are getting in the spread. Just try to get in and out on the correct week.

There is substantial risk of GAIN trading Seasonal Spreads!

 

[-oo0(GoldTrader)]

Aloha Markus and traders on the board. I am playing catch up here; I don’t mean to overload you with my ideas. However, I will fire away.

For the past three years I have been trading spreads, and I achieved excellent results:

Three years does not seem like a very long time. How long does it take to train as a doctor or an engineer?

I think I see why this happened to Markus so may I venture a guess.

More than once I doubled my account.

How many days did it take you to double your account. A week a month?

Doubling your account happens all the time if you don’t limit your gains. Let your good trends run.

However, I stopped spread trading last year, and here's why:

Commissions - My account the commissions were quite substantial.

Could this be overtrading. I see commissions as insignificant. Look at most business with employees, rent, insurance. The longer you hold a position, the fewer trades that you make, the less significant the expenses.

Limited Order Types - very difficult to enter the spread at the price you want, especially if you are not watching the markets all day long. “Don’t be a nickel & dime trader.

What could be simpler than having only one order type. Market on Close! The longer your trade the less significant the order becomes. You just have to get in on the correct day. When the seasonal thrust kicks in, your job is to build your position.

Slow Fills - Sometimes I received a fill 2 hours after placing the order.

What difference does it make if you are holding for six to eight weeks. I suspect you are trading a long-term regularity, short term.

- You should ONLY place a stop-loss or profit-taking order AFTER you received your fill.

Here is the reason for your success. Of course you place your profit-taking order AFTER you get your fill. Six to eight weeks after, not the same month! How can you make any gains if you are “Cutting your profits short?”

Slippage - you might be able to avoid slippage when entering with a MARKET order.

Just check your statement against the days close. If you suspect your broker is ripping you off with a MOC order. Use two brokers.

Trending... or not? - Focusing only on spread trading you might have missed this fantastic move.

You might just have well got a higher “return on margin,” in some other spread.

Conclusion - Spread Trading has many advantages, but also some limitations.

It looks to me like you are taking a 15 year pattern that shows a high reliability over a six to eight week time period and trying to use that as a reason to trade it short term.

The social utility of spread trading is considered to be mainly in the transfer of risk, and increase liquidity between traders with different risk and time preferences. Seasonal spreads favor the long-term trader, who does not have a lot of time to waste on the market. Traders who can sit with profits over long periods of time and adjust the position size with the direction of trend.

 

[Markus_H]

Aloha GoldTrader,

Of course all of your points are valid

You are right: When trading spreads I usually held a position a couple of days, maybe 2 weeks, not longer.

You know that I learned from Joe Ross, and I don't like giving a trade "too much room". So even when trading a 15 year seasonal, I got in and out a couple of times, because I don't want to see the 15-year seasonal suddenly turning against me. I have seen too many traders who held a position too long because the seasonal pattern suggested that prices should move up higher, and they eventually ended up with a loss.

About entering a spread MOC:
Talking to many spread traders we realized that there's no "perfect" entry: Intraday Limit, Intraday Market, MOC or MOO: All are valid entries having advantages and disadvantages. I traded all of them, and I like MOC best, though you never know where you will receive your fill.

Again: Yes, I recommend that every trader should at least consider spread trading. I just want to mention that there 's also another side of the coin

Greetings to the island,

Markus

 

[-oo0(GoldTrader)]

size & risk

This means you can trade more contracts than you could on an outright trade. This leads to larger losses when you place larger trades

It does not nessaraily lead to more loses spread.

$2000 loss is easily done spreads trading

Not on a spread with $400.00 margin.

Yes, the trade that FN pointed out was 50/50 which is fine, because the chances of being right are very high, (well 15 / 15 correct anyway). So say this was the one year it lost money, it would still be right 15/16 times next year, and a trade I think most would want to take

Excellent take the long-term perspective.

The charts are very important.

 

[-oo0(GoldTrader)]

Direct correlation

more recent history is more likely to be repeated than 10-15 yrs ago

Not true. Long-term cycles are more consistent than short term.

However I would be happy to trade spreads - certainly the less volatile ones with smaller tick sizes such as soybean meal.

I don’t know of any direct correlation between tick sizes and volatility. Where did you get that?

Calendars usually have the least drawdowns and highest “returns on margin.”

 

[-oo0(GoldTrader)]

repeated patterns

I don't really understand how your point about commission being a % of profit/loss is especially relevant to spread trading. This is true of all trading. Okay, you pay double commission with spreads but I can't see a further relevance.

I think the problem here is short-term overtrading. If he did not plan at the beginning to chop off the top of his gains, in time and price, costs would not matter.

However it is the repeated patterns going back so far that really attracts me. You don't find this sort of expectancy with outright trades.

Outrights have seasonal patterns also. Moore has charts. They are just a scarier ride.

 

[-oo0(GoldTrader)]

Consolidated chart?

Hi FTSE-B - I've not really worked out the format of the MRCI charts myself yet. Sometimes there's a 5 and 15-year chart given sometimes not.

Can you show us a spread that does not have the 5-year in red on the lower chart?

These charts should be used with care. I am not sure how they are constructed

You have that right.[/quote]You would be amazed at what goes into those charts and relating them all to each other.

It's useful to look at the individual charts of the years included if you have the time and resources to do so.

why are you looking for a correlation that Moore missed?

to send my ''18 top seasonal patterns'' (or some such title)

Do you think a printed book will be as current as Moore’s website?

ERA - if you got chance it would be great to hear what you think about the relative importance of the consolidated charts and the relative charts (bottom bit) provided by MRCI.

I don’t know what you mean by consolidated chart, but the 15-year pattern on both the upper and lower charts is the same.

 

[-oo0(GoldTrader)]

1,000 words

mauling their fine work with my annotations.

Masterly beautiful chart.

 

[-oo0(GoldTrader)]

attached chart

The way I read your chart weren’t we expecting a downtrend during the time shown. The charts show direction not necessarily magnitude..

 

[-oo0(GoldTrader)]

Do folk trade these?

Moore's hypothetical portfolio takes ALL trades. This will affect their results.

So would using some sort of trailing stop? So would waiting until after the seasonal thrust has actually arrived etc. Just starting in June instead of January would have made a tremendous difference in 2003 and 2004.

: seasonal trends in the outright?

Do folk trade these?

Yes of course. The Moore report isolates the top performing contracts, for the exchanges. They do not give that information away for free however. If you can’t afford it you should not be trading them. http://mrci.com Spreads have milder drawdowns, higher return on margin.

There's a guy on Elitetrader called ooO(GoldTrade)Ooo who raves about this book

-oo0(GoldTrader)0oo- That’s me Aloha!! Joes book coves straight seasonals also now that you mention it.

 

[-oo0(GoldTrader)]

Commentary on chart

It looks to me like the seasonal low corresponds to when taxes are due in the USA. Maybe after the demand for cash to pay taxes resides, interest rates will ease. The highly likely trade starts after that. By being short this you mean 05/06. The current highly likely is June05/07.

So the speculation here is weather the Sept05/June06 will out perform the Moore isolated June05/07. Or will the 07 fall further than the 06 on rising rates. I think it will.

As far as this trade goes, I would suggest using normal technical analysis to get on board. A downtrend line break, Parobolic, divergence etc.

It looks like we have until the beginning of June to put on the major part of our position. June is when the spurt is expected.

 

[-oo0(GoldTrader)]

Time spread convergence

Will somebody please translate this into English?

We have an experienced spread trader here who says

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

This assumption has remained un-challenged. Does anybody know what he is talking about?

Do you think convergence is the over-riding principle at work in seasonal spreads?

Investorwords says

convergence
The coming together of futures prices and cash market prices on the final trading day of a futures contract, as the basis approaches zero.

Investopedia says

convergence
A movement in the price of a futures contract toward the price of the underlying cash commodity. At the start, the contract price is higher because of the time value. As a futures contract nears expiration, the futures price and the cash price converge to eventually become the same price (usually).

In reference to the above chart that shows a seasonal window that has only four years behind it in an untradeable commodity. What does convergence have to do with it?

How can Convergence be the over-riding principle at work?

The key factor is not the correlation it seems to me, but convergence.

How can the key factor of a correlated seasonal chart be convergence?

yet time spread convergence is down and has been for many months.

What is “time spread convergence?”

Is this guy just blowing smoke in our faces or what?

I don’t know anything about lumber, seasonality etc, but as an oil trader I trade time spreads and inter market spreads all the time. The key factor is not the correlation it seems to me, but convergence. But trading a long time strip, j/u for example, you are implicitly trading j/k, k/m..etc. If the front spread is weak, you should be selling it, if it’s strong you should be buying it - simple. Convergence in commodity spreads is the over-riding principle at work.

Look at the wti spreads- oil at $55++ and bullish, yet time spread convergence is down and has been for many months.

OilTrader goes on to say

If the front spread is weak, you should be selling it, if it’s strong you should be buying it - simple.

Hay I trade Euro$. The front is weak and I sell it, because this time of year the far is weaker.

Anybody up to translate this convergence stuff into English so that I can understand it. I surly do not want to miss out on any “over-riding principles at work!”

 

[jimmy1]

euro$$ i trade....
i look at the long end if i think the long end will rally i sell the spread if i think the long end will come off i buy the spread.... thus i do the opposite of the far end of the leg.......
edu5 vs edz5 if the 10yr note is rallying ill try to sell this spread sell the front leg buy the back leg, it works inversely is this the same as commodities?

 

[-oo0(GoldTrader)]

June06/June07 Euro$.

This is a chart of June06/June07 Euro$. The point I am trying to make is that the seasonal charts (see above post), are only concerned with the data in the yellow area. Outside of that area you do not know what the reliability factors are, you are guessing. The results are for the trade window only. Technical signals should be weighed in favor of what occurs INSIDE the window.

In this case the time period under examination has a seasonal chart with a yellow area that uses June07 on the short side. The above post says they are using a non-yellow area chart with June06 on the short side. This chart shows why it is better to go with the recommended spreads instead of going off alone. The June 06 is gaining on the June07. The 07 is the one to be short of. While it is possible that the 06 and 07 may trade the same. That is not the way to bet. The whole spread is based on the far falling further. Two years should fall twice as far as one.

The theory at work with rate spreads was explained by Greenspan last month.

Greenspan> In this environment, long-term interest rates have trended lower in recent months even as the Federal Reserve has raised the level of the target federal funds rate by 150 basis points. This development contrasts with most experience, which suggests that, other things being equal,

increasing short-term interest rates are normally accompanied by a rise in longer-term yields.

The simple mathematics of the yield curve governs the relationship between short- and long-term interest rates. Ten-year yields, for example, can be thought of as an average of ten consecutive one-year forward rates. A rise in the first-year forward rate, which correlates closely with the federal funds rate, would increase the yield on ten-year...

The far months should require a risk premium. Each year out should have more. So, as rates rise, the cost of Euro$ fall. The further out will fall further on rising rates as long as there is sufficient liquidity for us to trade them. Seasonal charts are not selected at random, all of this and moore is taken into account before the rest are eliminated.

Technical signals can be used to get in partial positions early, as long as you are aware a cycle low is due and may not have occurred yet. If it hits on schedule, after you are in, this is not a time to be getting out. In general you want to use the trendlines that develop inside the yellow area along with other tools after the seasonal has made its low.

 

[-oo0(GoldTrader)]

Short soundings

Just one more thing:
The best way to find a bottom is to be short going into it.

FWIW, I'm looking at ED M6 - ED U5
I'm currently on a paper short on the chart, which is against what MRCI would suggest, but I still think it's got further to fall, until the uptrend in April.

They suggest being short this time of year, but in different months (see above).

 

[jimbo57]

GT
If you look at post #8 in the above thread, you will see that I specifically excluded highly seasonal time spreads in answer to a question from FTSE B. I was looking at crude oil time spreads.

The only time I ever do correlations is when calculating VaR on my book

 

[-oo0(GoldTrader)]

What is the convergence principle?

What exactly is the convergence principle?

the first is WTI and demonstrates the convergence principle very well.

What chart?

I don’t see a chart. I did not find a post of yours with a #8. Can you post and explain a chart, that demonstrates the convergence principle as you use it?

The seasonality/weather reaction can override convergence.

I suppose you are referring to the tendency of premiums to deteriorate as contracts expire. Does this mean that this overriding principle is dampened by seasonality?

Does seasonality usually override convergence?

you must trade in the direction of convergence (of the spreads).

Does this also apply if the contracts do not settle in cash?

What makes them diverge in the first place, and why don’t you trade them when they are diverging?

How does this apply to old crop/ new crop where expiration may be at different prices at different times?

I would not recommend trading HO spreads.

Do you mean to say you would not trade Heating Oil using the convergence principle?

I say this because there have been some highly reliable seasonal spreads in HO that I would definitely recommend traders try using seasonality.

Hello FTSE Beater

Re the charts you have put up, the first is WTI and demonstrates the convergence principle very well. The second two charts are heating oil charts, which displays a huge seasonality (summer/winter) as well as sharp reactions to near term weather forecasts - I would not recommend trading HO spreads. The seasonality/weather reaction can override convergence.

On the crude side, the main point I was trying to get accoss, perhaps not very well is that you must trade in the direction of convergence (of the spreads). Crude (WTI) is a great example. Flat price it has been very bullish for a couple of years, but convergence in the spreads is most definitely down and continues to be this way. Yesterday is a prime example, a huge up day in the market, but whilst the front month CLJ05 was up $1.40, CLZ05 was up $1.60.

Many think of spreads as a low risk flat price trade (the correlation between the months taking out much of the risks) - this is definitely not true, it is a different beast altogether.

Best regards

GT
If you look at post #8 in the above thread, you will see that I specifically excluded highly seasonal time spreads in answer to a question from FTSE B. I was looking at crude oil time spreads.

The only time I ever do correlations is when calculating VaR on my book

 

[jimbo57]

GT

You have quoted my post #8 verbatim, so I am somewhat confused that you say you cant find it.

It refers to charts in FTSE B's post #6 and he responded in post #11 implying he understood the explanation.

I will not post a chart as I do not own the copywrite on my charts- they are not mine to post here. Trading divergence is the same as trading counter-trend flatprice, you may win, but the odds are already against you.

Seasonal spreads do not display convergence, non-seasonal spreads do. I think HO spreads can be a good trade, but are not a convergence trade.

Please do not send me any more PMs - I will not respond to them.