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Spread
Scan Issue: August 01, 2007 - Volume 155
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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 March 08 Corn and short July 08 Corn (CH8 – CN8). The spread has been trading in correlation with the year 2004, which means both spreads are behaving similarly. Even if we don’t know why both spreads behave in a similar manner, there might be a good chance the current spread will continue following the spread from 2004, and move up in August (not shown on the chart above).
Traders may want to enter the spread at -18 ¾. Margin for the spread is $203 (reduced margin). Suggested risk is $200. Initial projected objective is $200, then a move up to -4 or higher.
On July 19 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider entering a calendar spread EDH8 – EDU7 at a spread value of 0.12. Please ask your broker for the margin. Suggested risk is $300. Initial projected objective is $300, then a move higher. Basis is seasonal (app. 6/11 – 9/3)."
Here's how we suggested managing this trade:
07/20 Suggest entering MOC on Monday.
07/23 In?
07/26 Spread hit first suggested target. Suggest moving stop to break even.
07/27 Suggest moving the stop higher to 0.21.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, I have seen statistics from highly successful seasonal spreads, showing an optimized entry and exit date. Some spreads show to be profitable over 90% of the time just by entering and exiting on specific days of the year. Why do I have to look at the charts?"
Andy: The problem is in the statistic. A trade counts as “successful” whenever it makes some profit between the entry and exit date. But what if the trade had a huge draw down in-between? For example: You enter a corn spread at break even on a specific date. At exiting the trade at the specified exit date, you make $50 profit. That’s great because the trade was a winning trade. But what if the spread went down to -20, making a draw down over $1,000 before it moved back up to your entry point? Would you still say the trade was successful, or would you have been stopped out? I think you understand where the problem is. That’s why we use charts to “fine tune” our trades. Even if we know about the optimized entry or exit date, we still have to trade what we see on the current chart. This is what really matters. We are trading "futures," not " pasts."
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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!