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Spread
Scan Issue: June 27, 2007 - Volume 150
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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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Today we consider a calendar spread: long August 07 Live Cattle and short October 07 Live Cattle (LCQ7 – LCV7). The spread has been in a sideways range for the last few months, trading between – 4.2 and – 3.2. There is a high correlation to the years 1990 and 2000, with a possible up move in the next few weeks. It is also important to know that in the last 35 years the spread has been below -4 only 4 times.
Traders may want to enter the spread at a value of -4.0 limit. Initial margin for the spread is $540. Suggested risk is $400. Initial projected objective is $400, then a move to -2.0 or higher.
On June 18 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider selling July Soybean Oil at 35.86 stop market (if pit open >= 35.87). Initial margin is $608. Suggested stop at 36.60 (app. $450). Initial projected objective is 35.06, then a move down to 33 or lower. Basis is seasonal and a TTE in front of a RH. Comment: Soybean Oil is the weakest market of the soybean complex (S and SM are making new highs). "
Here's how we suggested managing this trade:
06/19 Short at 35.86. Suggest taking profits even over night in the elec. market. Suggested stop at break even (only during pit session).
06/22 Suggest moving stop to 35.53. You have to roll into December on Monday. After rolling into December, the suggest stop will be 36.90.For more information about our daily newsletter, 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, very often I am getting stopped out during the overnight trading. Why is that and is there anything I can do to protect myself against such unpredictable movements?"
Andy: You are getting stopped out because they run the stops during the overnight session. The market gets very illiquid, and it is an easy task to run all possible stops during the night. Please have a look at the following charts.
The first chart (BO-067) shows the July 07 Bean Oil pit contract. Look at the last bar from trading day 06/11, and compare it with the last bar of the second chart (ZL-067). The second chart shows the electronic July 07 Bean Oil contract, including the overnight session. You can see the market moved up to get all the orders during the night session. Both markets (pit and electronic) opened at around the level of the close of the previous day.
All you can do to protect yourself against such criminal movements is to cancel your stop during the overnight session in all illiquid markets, and to place it back in during the open outcry session only.
Profit-making concept — keep trading simple using the LAW
The truth is simple, and the charts in the markets follow a law. I call that law
The Law of Charts™
The Law of Charts™ brings you the pure simplicity of what the market is all about. Trading markets does not have to have to be complicated. Everything you need to know to make money in the markets is right there before you when you look at a chart of the prices in the market.
Some traders think that the more complicated something is the better it is, when the truth of the matter is just the opposite.
Every time you view a price chart, the truth you need for making money is staring you in the face. It is looking right back at you.
There is truth in every price bar you see, and in every group of price bars there is additional truth. It doesn’t matter whether or not you use traditional or candlestick price bars. The truth is the truth, and you will find it on the charts.
You will have to think to find it. You will have to use your imagination. The truth of the markets is not going to be found in an indicator, or a mathematical formula. You will not find it in Fibonacci ratios, Elliott Waves, or Gann theory.
I don’t mean that people cannot make money using those things. What I do mean is that if you are able to throw off all the complications of theories, indicators, and mathematical ratios, you can come to see what is really there on the chart when you look at it.
My students have told me that once they understood the markets, all they ever need to trade them profitably is an understanding of the Law of Charts™ along with the dynamics of the market. You are going to receive both of these and more, learning to trade profitably from this simple trading concept of the LAW of Charts™. Follow this link for more information about the ONLINE SEMINAR which you can take right away!
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2007 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!