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Spread
Scan Issue: October 30, 2006 - Volume 116
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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 inter-market spread: long March 07 Soybeans and short 2 March 07 Corn (SH7 – 2*CH7). We see on the chart above the spread has been in a down trend for the last few weeks. Will the spread follow its seasonal pattern now and turn around? We don’t know, but after such a strong down move, we very often get a nice move into the opposite direction. Conservative traders can wait for the next Ross Hook to enter instead of taking the 1-2-3 low. Please notice the ratio of the spread is 1:2.
Traders may want to enter the spread a value of –28 ¾. Margin for the spread is $3,039 (no reduced margin). Suggested risk is $750. Initial projected objective is $750, then a move to 60 or higher. Basis is seasonal (app. 11/01 – 11/30).
On October 23 we told subscribers of our daily newsletter, Traders Notebook, "Consider entering an intra-market meats spread LCG7 – LCM7 at a spread value of 4.25. Margin for the spread is $405 (reduced margin). Suggested risk is $300. Initial projected objective is $300, then a move to 8 or higher. Basis is seasonal and correlation and a 1-2-3 low. Comment: We get a long signal on both charts. The correlation chart looks especially nice. We never know what will happen, but we know our risk and a possible target. I would say it is worth giving it a try. Be aware there is very low volume in LCM7!"
Here's how we suggested managing this trade:
10/23 Suggest entering MOC tomorrow (if not already in).
10/26 Spread hit first suggested target. Suggest moving the stop to break even.Open equity on remaining contracts: $120 per contract. Please keep in mind that we already realized profits of about $300.
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Student's Question: "Andy, everyone talks about controlling emotions. But how do I do it?"
Andy: Winning traders cannot afford to be ruled by their emotions. The nature of trading demands an objective, logical approach. If you experience extreme excitement after a win and extreme disappointment after a loss, you will be living on an emotional rollercoaster: up and down, up and down. We are not saying to turn into an emotionless being, one like the “Terminator” from the movie of the same name. Many beginning traders have head knowledge of what it means to control their emotions. But when it comes to putting the idea into practice, they find it difficult. It takes practice, but it is possible to control your emotions and to achieve the objective, logical mindset that is needed for trading profitably. The most effective way to control emotions is to focus on those things you know to be true. You must develop confidence in yourself and in what you are doing. The only way I know to do that is to observe the markets, notice those things that take place a high percentage of the time, get them down on paper, and then begin to trade them — you can paper trade or use a simulator if you feel the need. Keep in mind that you will have losses. No method, approach, or system is perfect. But if you choose high percentage occurrences, you can rely on the fact that, if properly managed, you will come out on top.
© 2006 by Trading Educators, Inc
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Disclaimer:
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!