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Spread Scan Issue: February 11, 2009 - Volume 233
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Otherwise, welcome to this week’s issue of the Joe Ross Spread Trading Newsletter.
The Spread Scan weekly newsletter is designed to assist you in becoming a better, more complete trader by showing you, within the context of the markets, how to trade spreads.
In this newsletter you will see applications of spreading in the futures and commodity markets. Spreads are applicable to all futures markets including currencies, commodities, financial instruments, and stock indexes. It is even possible to trade spreads in the all-electronic intraday market using day trading techniques.
Spreads are based on seasonality, correlation, backwardation, chart patterns, and simple observation. Spreads follow the Law of Charts™ and can be implemented using the Traders Trick™ entry.
In each issue of Spread Scan, you will find an upcoming spread trade for your consideration in the following week. You will also find a review of an existing or closed spread so you can see and learn how spread trades are managed.
Spreads offer you the most efficient use of your margin account of any other way to trade. Many traders find they like them so much that spreading becomes their primary way of trading.
Each week we present spread trading examples and opportunities to help you become a more professional spread trader, and we provide you with helpful content of interest to traders:
Be sure you receive all your issues of Spread Scan so that you can continue to enjoy learning through the best free educational trading information available, and so that we can keep you informed about additional educational services and products to help you grow as a successful and profitable spread trader.
This week we look at LCM9 – LCQ9: long June '09 Live Cattle and short August '09 Live Cattle (CME).
Today we consider a calendar Live Cattle spread (CME): long June '09 Live Cattle and short August '09 Live Cattle (LCM9 – LCQ9). After showing an uptrend between September and December 2009, the spread pulled back in December and January. The spread has been in a sideways range since then. Is it getting ready for its seasonal up move between 02/03 and 03/09?
Traders may want to enter the spread at a close above -0.725. Initial margin is $473 (reduced). Suggested risk is $500. Suggested first target at 0.70, then a move to 3.0 or higher. Basis is seasonal (2/3 – 3/9) and a 1-2-3 low. Comment: This spread is not very liquid; please talk to your broker about it if you are not sure at what exchange you should initiate the trade (CME or GLOBEX).
On January 26 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider entering a Eurodollar calendar spread (Globex) EDH9 – EDU9 at a close above 0.085. Please ask your broker about the margin. Suggested risk is $350. Initial projected objective is $350, then a move to 0.40 or higher. Basis is seasonal (1/20 – 2/23) and a possible resistance around break even."
The trade was also considered in Spread Scan # 231 from January 28, 2009.
Here's how we suggested managing this trade:
01/26 Suggest entering today around the open.
01/27 In at approx. 0.08. Suggested mental stop at -0.06.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
It’s All About the Exits!
Student's Question: "Andy, why is there such a big difference between a spread chart using pit contracts and the one showing electronic contracts? Sometimes the pit chart looks nice and smooth, and the electronic chart looks much more volatile and completely different."
Andy: When we look at a spread chart, we don’t see the real values of the spread, because usually we don’t get the spread data from our data provider. What happens in our spread charts is that the spread gets calculated artificially. We get data for leg A and data for leg B, and then we calculate the spread A – B by a simple mathematical subtraction.
But what happens if leg A of our spread above doesn’t trade in the last 10 minutes before the close, but leg B shows a lot of movement? The answer is that what we see on the chart is not the real value of the spread as long as we don’t have a final trade on both sides.
Pit charts and electronic charts sometimes differ when we look at illiquid spreads. The difference exists because in the pit contracts we have a settlement price, and some chart providers use the last tick (and not the settlement price) for their electronic symbols. Even if there is no trade in leg A, the exchange calculates the settlement price for A, and the chart looks much smoother than the electronic contracts, where you can see only the last tick on leg A and leg B. This is the reason why I prefer to use pit contracts for illiquid spread charts, even if my spread trading happens mostly in the electronic markets.
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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!