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Spread
Scan Issue: February 07, 2007 - Volume 130
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Today we consider an intra-market meats spread: long June 07 Live Cattle and short August 07 Live Cattle (LCM7 – LCQ7). Even though the spread chart above doesn’t look very smooth, it is possible to see that the spread has been in an uptrend since December, 2006. Seasonality tells us the spread should move up even faster in February. I would consider the following two entries:
1) an entry on a pullback at 1.60 limit or
2) an entry on a break out at 2.075.Margin for the spread is $530 (reduced margin). Suggested risk is $300. Initial projected objective is $300, then a move to 4.0 or higher. Basis is seasonal (approx. 2/7 – 3/7).
On January 17 we told subscribers of our professional daily spreads & position trading newsletter, Traders Notebook, "Consider entering an inter-market grains spread MWH7 – WH7 at a spread value of 27 ¾. Margin for the spread is $1,663 (reduced margin). Suggested risk is $400. Initial projected objective is $400, then a move to 60 or higher. Basis is seasonal (app. 1/1 – 2/25) and a RH. Comment: Last week the spread broke out of its trading range. Minneapolis Wheat is sometimes a bit tricky. I would suggest to wait for a break out of the hook and try to enter the next day via limit order."
Here's how we suggested managing this trade:
01/18 Suggest entering tomorrow at 30 limit. Spread is moving fast. If not already in, suggest using a risk of $500 per spread.
01/19 It was possible to enter at 30. Suggested stop at 25.
01/24 Spread is close to the suggested stop.
01/25 Suggest exiting if the spread doesn’t move above 30 tomorrow.
01/26 Suggest moving the stop to 25 ½ if still in the trade.
01/31 This spread just doesn’t want to move up. Suggest exiting if the spread doesn’t move up tomorrow, or moving the stop closer to 27 ¾.
02/01 Are you still in the trade? Please let me know with a short email! Thanks!
02/02 Some are still in the trade. Suggest keeping the stop at 27 ¾.For more information about our daily newsletter, visit our website:
http://tradingeducators.com/studentsonly.htm or visit our Spread Website to find out more about Traders Notebook
Questions or Comments? Please email us: support@spread-trading.com
Student's Question: "Andy, how do you handle “targets?" Very often the market comes close to my first target, but doesn’t reach it. The next day I get stopped out with a loss. Am I doing something wrong?"
Andy: I know it is against what you read in most trading books, but maybe you should take your profits sooner. Whenever a trade comes close to your first target, your entry has been right. Even if the trade doesn’t reach your target, your overall trading idea was the right one. Should you give back all your profits or even accept a loss? I don’t think so. Take some profits, or at least move your stop to break even! Of course you will get stopped out too early from time to time, and the market will move your way right after you got kicked out at break even. But remember, you can always get back in! Always take care of your losses; try to keep them small. The winning trades will take care of themselves.
If you are a Traders Notebook Subscriber, we'd like to encourage you to take advantage of our Live Chats for Spread Traders.
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If you are not a Traders Notebook Subscriber, please visit our Spread Website to find out more about Traders Notebook.
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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!