Looks like the seasonal pattern shows a nice upside - keep the entry and exit rules relatively simple and look for good risk-reward. If someone held a gun to my head and forced me to take this trade, I would go long on a close above the recent swing high (just under 8.4) and place a mental stop (many brokers don't do stop orders on spreads) below the recent swing low (high 6's). That's about 1.5-2 points of risk. Target the yearly high as the target, and get out before that if it breaks higher support levels (i.e. goes up, retraces a bit, goes up more, then breaks that new swing low from the retracement.) Risk-reward if you hit the target is 3:1, 4:1? Size your position so that, if you suffer a loss, it is no more than 2% of your capital. If you have $10,000, then only buy enough contracts so that you lose a maximum of $200. When trading leveraged instruments, you win by not losing. Just thinking out loud here. I'm sure there are people on here who are 1,000's of times better than reading price action. I have ZERO opinion or knowledge about the fundamentals (although I do like ham...)
Sure... So the basic principle is rather simple. It ain't rocket engineering, that's for sure. Suppose we start with a time series that we believe exhibits some mean-reversion properties. Also, let's say that, in your latest observation, you establish that the model residual is, say, n (where, for simplicity, let's assume your model is some flavor of multiple regression). Next you fit some sort of a AR model to your time series (I actually do it to the residuals) and you establish the speed of mean-reversion, e.g. smth like a half-life. The last step is to obtain the volatility of the residual time series in the most bog-standard manner (stdev). Now you have pretty much everything you need to calculate what I call the ex-ante Sharpe over the period equal to the half-life. Your denominator, i.e. the return, is n/2 plus carry. Your numerator is the volatility from above (normalized to the half-life as well). Once you have the half-life Sharpe, you can "annualize" it to bring everything to a consistent basis. None of this is particularly scientific and it doesn't even have to be that rigorous, i.e. you can estimate your inputs whichever way you like, including waving fingers in the air. Again, we can discuss the technical details of the specific steps separately, but my point here is more about a consistent framework for entries and exits. You can make the approach above systematic (not that I recommend it). Specifically, suppose you have a limited risk budget and you scan your opportunity set for trades, say, every day. As soon as you establish that either a) an existing trade's ex-ante Sharpe has fallen below a set threshold; or, b) a new trade exists that has a higher ex-ante Sharpe than an existing trade; you exit the existing trade and, in case b), strap on the new one. You can also make the size of the trade dependent on the Sharpe. Now, obviously, this is all VERY simplistic and there's lots of devils in the details. However, I really like to use the above as a self-consistent starting point that you can refine to your heart's content (sky's the limit). As I mentioned, we can talk further about the gory details, including the "divergence" issues (if I understand what you mean correctly, there may be a way to deal with some of them).
I use MRCI to screen most of my trades and have actually already entered this spread on a the breakout above 8.0. My typical strategy for these seasonal spreads is very similar to drm7's strategy above. In this particular case I was out quickly as I had my profit target pretty conservative (I have a few other positions on and I don't want to get too big right now). Entry 7/22 @ 8.225 Exit 7/27 some @ 9.300 and some @ 9.800 I had two stop levels 7.4 and 6.5 that did not get triggered. Nice trade that happened to work as planned!
I have enjoyed reading through this thread so I appreciate the tone and willingness to share ideas. I don't have the same experience or skill levels as others, but have noticed that the seasonal spreads that I primarily focus on can be cyclical in terms of whether they are "working" or not. For example using basic strategies from the previous post there are periods of time where these trades work quite a bit, I get a lot of profits targets hit and less stopped out. After a bit they work less and I get lots of trades stopped out even though I am trying to be selective. Does anyone try to track these trends and manage their risk better? I recently developed a couple of indicators using MRCI's performance to help in that regard. You can see in the attachment that this past month's performance is the worst in the past couple of years, so if I expect performance to revert to mean I should get more aggressive in the near future. green line - short term moving avg blue line - longer term moving avg red line - average
Interesting GiantH. Are you looking at TA levels being taken near to the seasonal window, and/or the current market to be behaving closely to seasonal norm, or are you looking at fundamental reports to back the decision, or both?
I use very simple TA in order to wait until the spreads shows some strength, then pick an entry/exit strategy and wait for the entry strategy to be triggered. For example I want to see a down trendline broken, then put in 1 or 2 higher highs before I enter. I also watch RSI to help the timing a touch. Initially I tried to judge the spread's performance against the seasonal but it didn't seem to work well for me. What I like to see more is consistency in the seasonal, i.e. 5 and 15 yr trend well without big swings. I don't ignore fundamentals completely, but really only pay attention when things are trending hard. If the fundamental situation will support the seasonal then I might get a bit more aggressive or vice versa.
Giant Hogweed, you have the right method. Because underlying fundamentals drive futures spread relationships (other then some front month considerations) the spread has to show some staying power in the new direction. Hanging on by relying on seasonal premises when the trade does not work results in disaster more then half the time. As reliable as seasonals can be when they don't work it's usually because there is some overwhelming fundamental factor that the commercials are aware of but we are not. If there is one consistent pattern in my experience - when I hung on to losses beyond the parameters suggested by technicals it invariably ended badly. When there are no major fundamental shifts the front month is the driver of the spreads and reading the front month (support/resistance, breakouts,etc) helps to assess the spread. Cheers, 222bc
Thanks for your contributions. What is the y-axis on this graph? The percentage number of profitable trades recommended on a certain date?
The y-axis is based on the performance of recommendations that were closed on each date. A trade closed at a loss or stopped out will push the averages down, a trade that trends well will push them up. Because it is only using completed trades it is a bit of a lagging indicator, at some point I may try to incorporate trades in progress but I am not sure that it would help a whole lot.....