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Spread
Scan Issue: October 10, 2006 - Volume 113
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Joe Ross Spread Trading Newsletter.Each week we present spread trading examples and opportunities in order to help you become a more professional spread trader.
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Spread charts provided by Moore Research Center, Inc. (800) 927-7259, www.mrci.com
Today we consider an intra-market soybeans spread: long January 06 Soybeans and short July 07 Soybeans (SF7 – SN7). On the 15 year seasonal chart above we see the spread is normally moving up in October and also in November. Also, the spread has been following nicely its seasonal pattern so far and after moving down from February till August, it seems the spread is now ready for its seasonal up move.
Traders may want to enter the spread Market On Close (MOC) on Tuesday. Margin for the spread is $135 (reduced margin). Suggested risk is $200. Initial projected objective is $200, then a move to –10 or higher. Basis is seasonal (app. 10/01 – 1/30) and a break out of the September high.
On October 04 we told subscribers of our daily newsletter, Traders Notebook, "Consider entering an intra-market Lean Hogs spread LHG7 – LHZ6 MOC tomorrow. Margin for the spread is $675 (reduced margin). Suggested risk is $400. Initial projected objective is $400, then a move to 5.0 or higher. Basis is seasonal (09/29 – 11/3). Comment: There are two statistical entries for the same trade. One at 08/09 and the other one on 09/29. We already took an entry earlier (see TN from 09/13). It looks like the spread broke out of its long term down trend (black line) and is now on its seasonal up move. I am a bit late with this trade for the ones who prefer to enter MOC the same day but I just did not expect such an explosive up move."
Here's how we suggested managing this trade:
10/04 In?
10/06 Suggest moving the stop to 1.975.Open equity on remaining contracts: $200 per contract.
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Student's Question: "Hi Andy, can you tell me something about the time stop you are using for your spread trading?"
Andy: There are two different type of time stops I am using. The first one is a time stop I use whenever I enter on a break out. I want to see the trade moving my way in less then 4 days. If the trade doesn’t go my way, I am out! The second one I use tells me how many days I willing to wait till my trade moves up to my first target. This time stop is not a fixed amount of days because it depend a lot on the nature of the spread. Is it a volatile spread it can be a week or only a few days. Is it a slow moving spread it can be even a month. It really depends. This kind time stop is also not very precise. It only tells me “if the spread doesn’t move up till xx.yy then I am out”.
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The Commodity Futures Trading Commission has asked us to advise you that trading spreads is complex and carries a high degree of risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders!