Think or Swim are the resident experts on Pairs / Spread Trading. You should look them up, ref: Tom Sosnoff is the head honcho over there. GL
Hi Andy, How are things going? I enjoyed the insightful phone conversation on yesterday. Did you receive my e-mail regarding Genesis FT? Do you have any updates on your journal? Thanks, Walt
Hi Walt, yes...received and answered! I would love to do more with the journal but trading keeps me really busy at the moment (besides other things). I am just posting FAQ's once a week but don't give any "Trade Examples" or "Trading Ideas" anymore. This way, I want to keep the journal alive and who knows, maybe I will get an assistant one day. ;-) Have a nice eastern weekend, Andy
Andy, I have heard spread trading is less risky than outright futures trading. Is this true? Yes and no â it depends on what kinds of spreads we are talking about. Maybe we should put them into different categories: High-risk, chaotic spreads: Spreads with each side in a different, unrelated market. For example, Live Cattle â Emini S&P. These spreads donât make much sense. High-risk spreads: Inter-market spreads like Feeder Cattle â Live Cattle; Euro â Japanese Yen; Wheat â Soybeans, and so on. Even if the two sides of the spread are related to each other, both sides can behave independently (i.e. Feeder Cattle can move up and Live Cattle down). These spreads can move even faster than a single outright futures position from time to time, especially when it comes to a limit up or down situation in one of the markets involved in the spread. Mid-risk spreads: Intra-market or calendar spreads in two different crop years like December 07 Wheat â May 07 Wheat. Even if you trade the same market on both sides of the spread, these spreads can move fast because the contracts are in two different crop years. But they are much less sensitive in a limit situation than inter-market spreads. Low-risk spreads: Intra-market spreads in the same crop year, like September 07 Corn â December 07 Corn. These spreads carry the least risk even in extreme situations. Whenever you want to enter a spread, think about the relationship of each contract involved. But also have a look at the spread chart, to see how fast the spread has moved in the past. This should give you a good idea of what to expect in the future. Be extremely careful whenever it comes to a limit up or down situation.
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 âsuccessfulâ 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. Thatâs 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. Thatâs why we use charts to âfine tuneâ 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."
I will try to post some trading ideas again from time to time. The following spread KWN8 - WN8 has been trading in a range since March 08. It looks like the spread doesn't want to move lower and seasonality (6/4 - 6/30) should help to move the spread higher. http://share.esignal.com/groupcontents.jsp?folder=&picture=KWN8-WN8.gif&groupid=707 The idea is to get into the spread at around 35 with a mental stop on close at around 25. First Notice Day is 06/30 for both legs. Happy trading, Andy
Trading Idea KWN8 - WN8: After moving up to 49 on 06/19, the spread fell back down to 37 3/4 and is now at 39 1/2 (06/24). I would close the position with a small gain. First Notice day for both contracts is 06/30. Happy trading, Andy
Andy, How do you handle it when a pair goes from contango to backwardation, or visa versa? I was trying to time my entry with crude oil, as it was in a state of backwardation. However, just as I'm entering my position, it flipped to contango. What was a very good entry under backwardation, turned into a bad entry. Please help... thanks, Walt