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Spread
Scan Issue: November 21, 2007 - Volume 171
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Today we consider a calendar spread: long June 2010 Eurodollars and short June 2008 Eurodollars (EDM0 – EDM8). After moving down to almost -0.70 in August '07, the spread has been trading sideways with a double low at around -0.55 in September and November '07. Will seasonality (11/05 – 12/11) help the spread to break out of the long term downtrend, or will it keep on trading sideways?
Traders may want to enter the spread at MOC today. Initial margin for the spread is $371 (reduced margin). Suggested risk is $250. Initial projected objective is $250, then higher. Basis is seasonal (app. 11/5 – 12/11) and a 1-2-3 low. Comment: the September low seems to be a good place for a mental stop.
On November 18 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider selling December Soybean Meal (elec.) at 290.8 stop market (if pit open >= 291). Initial margin is $1,823. Suggested stop at 296.1 (app. $520). First suggested target at 285.1, then lower. Basis is a reversal bar and the large short position of the commercials."
Here's how we suggested managing this trade:
11/19 Short at 290.8. Suggested stop at 296.1.
11/20 Trade hit first suggested target overnight. Suggest moving stop to break even.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, can you give me some idea of how much money I should risk on each trade?"
Andy: This is really a tough one, because I do not know enough about you, your trading style, or the amount of money you trade. But I will try to give you some general ideas. I personally feel the most logical way is to risk a certain % of my trading account on each trade. For example, if your trading account is $20k, and you are willing to risk 5% on each trade, you would risk $1,000 on your first trade. If your account grows to $22k, you would then risk $1,100 on the next trade, and so on.
Next you will probably ask the following question: “What % should I risk for my trading?” And this is where the problem starts. If you risk too much on each trade, you will be out of the game whenever you have several consecutive losses. If you risk too little, your account will grow really slowly. Without going into details, try to think through the following points:
- how many consecutive losing trades are possible the way I am trading?
- what is the maximum drawdown I am able to accept?I totally agree when you say it is very difficult to find out how many consecutive losing trades your trading style can produce. We are not able to look into the future, and anything is possible in trading. But your trading journal should give you a good estimation. If this trading style or method is new for you, you should try to get a good estimate from somewhere else, or you should do some paper trading to get at least an idea. With these numbers (how many consecutive losers and maximum drawdown) you are now able to find out if the percentage of risk on each trade is too little or too much for the way you trade. All you have to do is to calculate the balance of your trading account after all the consecutive losses, using the percentage of risk you are willing to take on each trade. If this is something you can live with, stick with it. If not, lower or raise the risk on each trade, and do the calculation again.
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Disclaimer:
The Commodity Futures Trading Commission has asked us to advise you that trading spreads or outright futures 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!