Seasonal spreads

Discussion in 'Journals' started by hrokling, Apr 23, 2007.

  1. Some thoughts:

    -- I suspect that this kind of trading is prone to large losses. It is probably a good thing to use relatively modest stops, based on either the required margin or historical profit for the trade. Or at least, have 2 trades on, and close out one of them at a modest stoploss, to reduce exposure to large losses.

    -- you are hammered multiple times with losses greater than $2000, which wipes out a lot of the small profits you realized. I am not saying to use a $50 stop, but the point of using spreads is to have limited risk. However, you are banking the kind of losses people get with outright positions.

    -- And stops need to be placed ahead of time, not "mental stops." As you mentioned, you got distracted. You need some kind of GTC positions to get you out when things get bloody.

    -- It might would make sense to have a large profit target. Based on my recollection of MRCI, they have a tendency to show a large profit, and then have it quickly turn into a loss. Positional trading in volatile markets like this past couple of years requires a lot of discipline. Having a $5000 profit turn into a $5000 loss can ruin position trading. You don't want small profit targets, but letting large profits get away can kill you in the end.

    -- You are not showing your maximum favorable excursion (MFE) and maximum adverse excursion (MAE) for your trades. Without knowing the best and worst each trade was during its life, it is hard to analyze how money management may have helped/harmed your trades. I agree, blindly getting in and out on the dates is probably not the best.

    I would be curious to know how your objective of overbought and oversold functioned. I am not much of a TA person, but you listed a goal, and did no analysis to see how it performed...

    I am also curious, that given your Performance on this, what other types of trading you mentioned are more intesting. This experiment seemed to be a reasonably good use of capital...
    #381     Jul 29, 2009
  2. TraderZones, thanks for taking the time and for interesting questions.

    Yes, exactly. That's what I've been using. I think earlier I did at least outline the thinking of my stoploss, if not the whole formula.

    I'm comfortable with this type of swings in equity, as I know it pays off IF you have positive expectancy (of which I'm now convinced seasonal spreading offers, although I didn't know so at the start of the campaign). The small profits or losses are not that important in my opinion, they're seasonality that just didn't work out as they have in the past. The profit targets were not really that small.

    I agree, if it was possible. However, this isn't (wasn't?) reliable with IB - and definitely not possible for spreads where you had to manually leg in. Of course if you use a floor broker, it's different. I always left GTC limits for entry and exit when it was exchange traded spreads (grains, eurodollars etc).

    I agree, that's also my experience. I had very large profit targets in fact, but also experimented with two targets. And yes, the spread movement can turn on a dime - there's a spike and then a turnaround. I've especially seen this in energies with RB and HO.

    I agree that MFE and MAE is very important. I have these calculations in my spreadsheet, I've deliberately only shown the P&L with the entries and exits here - but I stopped calculating this in Sep 07 as it was pretty time consuming and something I did from time to time, not continously.

    Ok, that is a super question. I don't know if you've read the whole thread, but I have a long background from mainly equities. I found my experience very helpful when I stepped foot in the commodities markets of which I was a complete and utter rookie. I think at times a simple moving average can be helpful, and isn't it Joe Ross who uses stochastics a lot? Anyway, I think TA in this context is more of a tool than a complete solution, and you really need to apply some discretion. And when the window of opportunity for a spread starts to creep up, you start to follow that spread more carefully and "notice" whether it's starting to break out to the upside. An additional idea could be a simple Donchian channel, used by trend followers.

    Other People's Money can often be far more lucrative if there's enough of it... But from Feb 08 to last fall I had to step away from the markets for family reasons, and the final part of the year was so part-time that I could only scalp.

    As for pursuing this, what I really want to do with it is to expand the number of spreads and work a lot more on the research side of it. There is so much more to it - meats and additional grain spreads are probably where I'll start looking. The benefits of havin even more spreads to diversify on are obvious, like you also touched upon with the large losses. I'll also add that the capital used here was so small that the position sizing ended up a bit imprecise.

    Another thought on capital would be how much size you can do. Thankfully, more and more commodities are getting active electronic trading. But a market like Oats, there are limits to how large a position you can do unless you go to the floor brokers (which is possible of course).
    #382     Jul 29, 2009