Spread Trading: Averaging Up

My teachers had just gone thru hours of instruction in the Why, How and Wherefores of diversification. I could clearly concede that you don’t want to buy anything without two of something else to balance it. Then Stanley off handedly said something like. Of course, when you find one that is really moving, you have to go for it.

Then they proceeded to explain stacking, pyramiding and averaging up.

In our Spread Trading, we are experimenting with averaging up at the end of the week, when we hit a new high during the week. We are trading on new weekly highs in the Seasonal window.

Here is the logic. When we have a security rising steadily, on average we expect a little incremental increase daily. So if in a perfect world the effects of increasing supply effect contracts for delayed delivery differently. Then we would expect the trend to continue during the week and over the weekend, 24x7.

If this held true we would be closing on the high of the week and each week would close higher than the previous week.

All of us do not trade for the same time duration. Short-term traders have to be out at the end of the week so that they do not have to put margin at risk over the weekend. So, we tend to see the uptrend confirmed by a little profit taking on Fridays close. These traders were on the same side of the spread as we were, so liquidating causes Friday’s close to move slightly counter-trend.

Our very purpose for being in this game is to harvest premiums for providing additional liquidly when it is needed.

First, we have the break out of the previous weeks high suggesting continued momentum in the direction of the seasonal trend.

Then we have the additional premium from off setting short-term traders, assuring us that we will not have to chase the market to be filled.

Third we have the built in market forces working in our favor for three days from when we get our fill on Friday to the next market close on Monday. Grain is still growing, the world’s hunger still eating.

Combine this with the increasing equity from last week’s position and you can see why we consider averaging up at the end of the week when we hit a new high during the week.

“When your security is acting right, you can safely add to your line from then forward!” Jesse Livermore

 

“Conflict of Interest," refers to the situation in which a person has a vested interest in the outcome of a decision, but tries to influence the decision making process as if they did not.

If you are requesting gossip and rumors from your broker, the broker will benefit from your decision to trade, but participates in the decision making process as if they were neutral. This puts the odds and the cash to their advantage.

Conflicts need not be intentional regulators just choose to set it up this way. You can depend on brokers to give guidance in how to place orders, when and what exchange to place the order on. As long has you have no trouble with the brokers executions of orders they are doing what you are paying them for.

If your broker is recommending trades unasked, get another broker before he gets all of your funds.

You are putting your Broker in a position of trust those conflicts with their simple need to earn a living by transacting transactions in your account. They make money off of you, win, or lose. Do not expect brokers to do more than what they do. A good broker can figure out what you want to do and place the orders at the proper time on the proper exchanges.

Research
If you plan to keep being successful in this game, you should hire and depend upon your own research. You should not be getting recommendations from your Brokers.

Hire your own Research, this in no place to be accepting freebees.

Brokers work transacting transactions for a living. Nothing that they tell you will not be influenced by there need too keep making a living.

Are your broker’s actions such that an independent observer might reasonably question whether the individual's professional actions or decisions are or could be determined by considerations of private gain rather than by potential benefit to the client?...

Brokers are in the middle. They take a slice out of your winnings and have no trouble adding on a slice to your losses.

In almost all cases, they will eventually help you kiss your funds goodbye.

 

or it can work if you have deep enough pockets to stand the pain as the spread goes against you

 

Don't get sore add some more??
Capital One-Providian
First hand at how much pain can you really handle??