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Spread
Scan Issue: January 17, 2007 - Volume 127
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Today we consider an intra-market interest rate spread: long June 07 Eurodollars and short June 08 Eurodollars (EDM7 – EDM8). The spread has been in a long term down trend since May 2006. Now it seems the spread is turning up by penetrating its trend line and making a 1-2-3 low. Is this the start of its seasonal up move? Eurodollars tend to decline from December through the end of March, and it seems that June 08 is declining more than June of 07.
Traders may want to enter the spread MOC on Wednesday. Please ask your broker about the margin. Suggested risk is $200. Initial objective is $200, then a move to –0.20 or higher. Basis is seasonal (app. 1/19 – 3/28) and a break out of a 1-2-3 low. Please note - it is possible to take the trade in the electronic market.
On November 26 we told subscribers of our professional daily spreads & position trading newsletter, Traders Notebook, "Consider selling February 07 Lean Hogs at 66.45 stop market. Initial margin is $1,215. Suggested risk is $400. Initial projected objective is 64.00, then a move down to 62.00 or lower. Suggested stop at 67.10. Comment: Elec. contracts don’t show any volume. I personally would trade the pit contract. I would not enter with a gap, I want to see the market is trading thru my entry value. Basis of the trade is seasonal and a Traders Trick Entry in front of a Hook."
Here's how we suggested managing this trade:
11/27 Short at 66.45. Suggest taking some money tomorrow (if not already done) and moving the stop to break even.
11/28 Suggest moving stop to 65.80.
11/29 Suggest moving stop to 65.05.
11/30 Stopped out at 65.05. Possibility to try a re-entry sell stop market at 64.65.
12/01 Short again at 64.65. Suggested stop at 65.45.
12/04 First suggested target got hit today. Suggest moving stop to break even.
12/06 Suggest moving stop to 64.60.
12/07 Probably out!For more information about our daily newsletter, visit:
http://tradingeducators.com/studentsonly.htmQuestions or Comments? Please email us: support@spread-trading.com
Student's Question: "Andy, can you give me some ideas about how to calculate the risk for my spread trades?"
Andy: Calculating the risk is a very important factor in trading. You can have the best trade selection but still lose money if you are sloppy in money management. How to calculate risk depends a lot on your general trading plan. Because you cannot have a stop loss in the market while trading spreads (only a mental stop), you should always look at the volatility of your spreads to calculate your risk. For example: Your mental stop for your spread is $200 away from your entry, but the spread you are trading usually moves $400 per day. Using only the $200 risk in your calculation of your contract size could be fatal for your trading account. Unfortunately, as it is so many times in trading, there is no “best way” in how to calculate the risk. Watch your spreads and see what make sense for you. Try to find your own way, but be consistent. Do not let gut feeling into your calculation. Be consistent in what you do!
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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!