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Spread Scan Issue: September 05, 2007 - Volume 160

Today we consider a meats spread: long February 08 Lean Hogs and short February 08 Live Cattle (LHG8 – LCG8). The spread has tested the low at -32 three times (in June, July, and August). Seasonal statistics tell us the spread should start its move upward around 08/29. If so, the spread should not fall below the August 2007 low anymore, and therefore that could be a good place for a mental stop.

Traders may want to enter the spread at a value of -30.10. Initial margin for the spread is $790 (reduced margin). Suggested risk is $800. Initial projected objective is $800, then a move to -26 or higher. Basis is seasonal (app. 8/29 – 9/21).

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Previous Trades:

Andy Jordan's Trading Bites

Trade Management - the key to being successful
by Joe Ross

All too many traders focus their efforts on identifying buy and sell signals. In fact, that’s what most trading books consist of — some way to find buy and sell signals. Trading systems are usually all about “where to get in.”

The research and analysis traders do is geared towards reaching the goal of getting that magic “base line” directive to guide their actions. This is not wisdom.

Any successful, experienced trader will tell you that although properly identifying buy/sell signals is important, it’s not the key to being successful. Instead, the way you manage each trade is what determines your success.

Traders who take the baseline approach tend to believe that the success of their trading activity is dependent on following the right buy/sell signals at the right time. Clearly, it’s important that a trader be able to understand the process of generating signals and to use the methods involved. Realistically though, almost any trader can find a way to generate signals, whether by using technical methods already out there, coming up with their own system, or using their platform’s automated signal generation tools.

Any successful, experienced trader will tell you that your trade doesn’t begin and end with a buy or sell. There’s a trade management process involved. For each trade you make, you’re making a group of decisions. The way you manage and time those decisions is what determines the level of success of your trade.

Let’ say two traders get the same signal at the same time, and act on it. One’s trade may result in profits while the other’s results in losses. How is this possible? It can occur because each trader made a different combination of decisions throughout the course of the trade. The decisions might include scaling in and/or out of the trade, using or not using trailing stop losses, setting or not setting profit objectives prior to entry, patience or lack thereof, etc. The trader who made the most effective overall combination of decisions will have the better trade results in the end. Of course, there are time when pure chance gives the better result to the worst trader.

It’s very important to regard trading as a process, and to understand that, as a trader, your efforts need to be focused on the activity of trading itself as opposed to getting a quick base line answer. Because there are many things to take into consideration in making your trades successful, it’s essential that you educate and train yourself in all the different areas. Learn how to develop better trading plans and analysis methods, and then learn how to apply what you’ve developed to the process of making a trade – from the original impulse to enter or to stay out of a trade to the control of your thought processes and emotions in managing that trade.

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View last week's Spread Scan # 159 - August 29, 2007