Spread Trading multi-positioning trading strategie!

Discussion in 'Financial Futures' started by -ooO-(GoldTrade, May 2, 2003.

  1. First I would like to thank Markus for inviting me to this thread. I do not mean to stomp on anything he says. Markus knows his stuff.
    Many traders leave some of there margin capital seasonally in spreads.
    Usually, if you restrict yourself to Nobs, you are going to miss the chance to take advantage of other market restabilizations. At certain times of the year, different spreads have the best potential. A beginner should not come to the game with a bias.
    In essence, these are
    Calendar spreads. Same commodity different months. Both contracts move about the same. We are trading the relative difference between how time affects the same commodity.
    Spreads can take a lot of research. You can get free trial from Jerry Toepke at Moore Research up in Eugene. The Free part of the Moore website has a link to
    “Symbols & Codes,” whenever you need them.
    You can train any broker to trade spreads. They make money off of you win or lose. So do not expect more than what they do. A good broker can figure out what you want to do and place the orders. Do you understand what a conflict of interest is? Hire your own research.
    Do not take advise from Brokers.
    If you could read charts, you would not need any oscillators. That said I trade with a group of successful traders. We enter with
    Stochastics if we see good correlation with past performance. Joe is the only source I know that teaches how to read close only spread charts. We use these and confirm with Jerry’s seasonal charts.

    We not only want to know the
    trend (trendline), the momentum (Stochastic Force). We also want to see the historical price pattern before it happens. We need to know when we are on or off course.
    Look, this is lame. There are many shades of “Spread Trading (
    multi-positioning trading) strategies,” Why confuse new traders by starting all spreads off with Int, Intr or Inte. Unnecessary complexity for a very simple subject. One person screws up and everybody else repeats the mistake.
    Click here to download Joe’s free Introduction to Spread Trading

    Calendar spreads are the easiest to trade. Old crop new crop spreads can be a little more volatile. Spreads in two different commodities or two different markets or two different countries are often the most volatile.

    Calendar spreads have the highest profit relative to margin. When you catch a seasonal trend, expect to earn your margin in about six weeks. You should start by trading these. There are certain times of the year when markets adjust. Producers and end users are willing to pay a premium for increased liquidity. We pocket these premiums as profits.

    Rama (rrs456)
    I don’t believe I have ever heard it explained better.

    >concepts were not very
    clear, books expensive, and few in number, utility unknown .. series of "barriers"
    Ok what is the minimum trail to your first successful trade. At a minimum

    “Reminiscences of a stock Operator,” "Reminiscences," gets into the details of Speculation and details you must thoroughly understand if you are considering making a living Speculating in securities.

    “Ross’s Spreads and Seasonals,” for in-depth technical analysis and trading tactics.

    “Jerry Toepke’s,” weekly spread commentary, for potential ideas based on the markets own performance in the past.

    With these tools, you should soon be able to enter and exit your first seasonal spread at a profit.

    Tharp’s Secrets of the Masters™" Trading Game
    GoldTrader has a
    “Seasonal Spread Traders Library,” posted on Amazon of all spread books with an Asin#.
    Joe’s book is absolutely necessary. Joe published these books to be
    course manuals. They stand alone, but cost a lot because he makes them big and useful. In the afore mentioned manuscript he uses RSI and Bollinger Bands to explain the methodology and the system. Stochastics works better.

    I know of no other source that teaches how to read
    close only spread charts. Joe did not stick to the subject of spreads; he confuses new traders by teaching seasonals and including unnecessary bar charts.

    New traders that have been
    consistently maintaining a profitiable portfolio of spreads tell me they are still having trouble with Ross’s book.
    I know traders that just use
    Jerry’s seasonal charts. In Joe’s book, he mentions BarChart for online charts. I have been trading using an ultra-light ThinkPad laptop since they came out. I cannot risk my Speculations on the reliability of software. There are to many things to do here in Hawaii to spend my life getting and maintaining reliable data.

    Using an
    online service is no hassle, low cost and easy. You can set up a portfolio online and check it from any Internet café or public library anywhere in the world.

  2. 1 Use Mony you can afford to lose
    Playing with the houses chips gives you more freedom.

    2 How long can you hold a position?
    What is your “Time Horizon?” Calendar spreads take about 6 weeks to develop. Full Seasonal cycles are about six months.

    3 Start small
    One calendar spread per $1,000.00 equity.

    4 Don’t over commit
    Because calendar Spreads are fully hedged you can run tight margins. Usually it can be touch and go for about a week. Nevertheless, when that seasonal thrust starts, you can pyramid and use equity to add diversification.

    5 Don’t form opinions during trading day
    Spread Trading is end of day trading. Read and make your plan when the market is closed. Make your daily decision about each one. Buy, hold, add, sell, or wait. Place your next day’s orders before you go to bed. Simple!

    JoeRoss "There is no advantage to trying to trade spreads intraday. Spreads roam all over the place during the day."

    6 Take a trading break
    Trade, rest, Trade, rest.

    7 Block out opinions
    Each trader’s view of the game is influenced by how long they hold a position. Trade a cycle you are comfortable with.

    8 Avoid Market Orders
    A system using limit orders may be better. Simultaneous MOO and Simultaneous MOC may be they only way you can be sure of getting in or out.

    9 Trade the most active months
    Part of the challenge with spreads is that the back months are often illiquid when we get in.

    JoeRoss "We have a limit that the least liquid side of the spread must have a volume of at least 1,000 contracts."

    10 Trade the divergence between related commodities
    Inter commodity spreads are generally a higher risk than calendar spreads.

    11 Diversify
    Diversification will reduce the volatility (risk) of your equity.

    12 Build a Pyramid
    Add to your winners by stacking or pyramiding. When you are hitting new highs build your position each week.

    JoeRoss "For spreads, we have no minor entry signal, but there are times when we will take the b/o of a trading range if we see good correlation with past performance."

    13 Never put all of your position on at one price.
    In this way, you can keep your wins, bigger than your losses.

    14 Never add to a losing position
    Scale down losing streaks, build up winners.

    15 Cut your losses short
    Small losses, large profits.

    16 Let your profits run
    Longer profit runs have higher profits.

    17 Learn to like small losses
    Business is profit & loss. Trade for big profits & small losses.

    18 Use stops carefully
    Spreads are already hedged there is no need to place stops.

    JoeRoss "As a rule, we trail exit orders based on Stop Close Only, and get out the next day, or … Market on Close."

    19 Avoid picking tops and bottoms
    The high momentum area often occurs mid cycle. It is easier to add to an established trend.

    20 Always take Windfall Profits

    21 Act promptly
    Do not go to sleep without placing your orders for the next trading session.

    JoeRoss "(place orders) before the market opens or about 10 minutes before the close."

    22 Don’t be a nickel and dime'er
    When you want in get in. When you want out, get out.

    23 Know the trend
    Trendlines form a box around the trading area.

    24 Watch for trend line breaks
    This is really a box break out.

    25 Use the half way rule
    Buy the bottom of the box, sell the top.

    26 Watch the magnitude of the market change
    The magnitude of change is indicated by the relative distance between the lines of your indicator. Compare it to how it has acted in the past on the same security.

    27 Congestion areas can be boxed with trendlines
    Breakouts are from congestion areas.

    28 Watch for head and shoulders
    These are patterns of accumulation and distribution that also occur in spreads.

    29 Watch Volumes
    Strength is Volume moving in the direction of price.
    Rising prices, with rising Volume is bullish.

    30 Watch Open Interest
    Strength is OI moving in the direction of price.
    Rising prices, with rising open interest is bullish.
    Rising prices with declining OI is short covering, Bearish.

    31 Focus on the process
    Focusing on the process rather than making profits will help you limit your emotional swings in trading.

  3. What are your settings for Stochastics and Bollinger Bands? What is your setup in Stochastics that signals you to take the spread trade --- do you use Stochastic crossovers, overbought/oversold, etc? (I normally don't use Stochastics as they can stay in overbought/oversold zones for a lengthy period of time, but maybe I can learn something new here.)

  4. > If you have some program that can make Stochastics. The correct
    > George Lane configuration is to use
    5 periods for %K.
    > Plot it with a
    3 period exponential moving average of %K for %D
    > Plot it with a
    3 period exponential moving average of %D for SlowD
    > Show all three lines over price.

    That is the easy answer. When we chart spreads, we use close only data. Correct Sto needs highs and lows. One of the reasons I like trading spreads is because of the high return on
    time. I can spend more time at the beach. The Online charts that I am now using offer a modified Stochastic that works well with spreads. They only allow %K and %D. So, the correct setting is 5 and 3.
    I will put on the largest positions when Stochastics turns up, %K on the right hand side with a bullish divergence from below 15 the week prior to a Seasonal window opening.

    Any turn up from a terminal area near a seasonal window opening bears inspection.

    Getting in
    after Sto turns up is just extra insurance.
    The Only valid signal is divergence. If you want a cross over use MACD.
    There is
    no such thing as overbought/oversold. Prices are never so high that they cannot be bought, or never so low that they cannot be sold.

    "Stochastic Pops," sure, you can use those to confirm pyramiding. Mainly use Stochastics as an aid to entry. Use "Waterfalls," as a warning of impending dips.

    Stochastics is really very easy to use on spreads. First, your valid signals are only in the direction of trend. The way we configure spread charts with the long first and the short later. The seasonal trend will always be up.

    All you have to do is look to see how Sto worked in the past relative to the price of the spread you are charting, and this will give you an indication as to how will behave when the pattern repeats.

    Pretty much, you are using
    Sto to get in then using the seasonal chart to stay in. You are not using Stochastics alone to exit.

    Stochastisc (Suspense) screams at me what is about to happen. Every day is like a Hitchcock thriller. Bollinger Bands tells me what already happened with the exception of the big squeeze before liftoff.

    I tried the default -20 in Bollinger. But by accident found the
    -5 shows the squeeze more distinct. I suggest you try both for a while. I no longer use the -20.
    The same way Porsche decides to come out with a new model. We hire a research consultant and follow their advice.
    You downloaded it yesterday.
    Joe Ross's free introduction to Spread Trading.
    Funny mentals,
  5. Markus



    excellent list of do's and don'ts.

    Thanks for your contribution.

  6. When you trade seasonals you are at the liberty of the seasons. We do not always have
    overlapping seasons. When I can, I diversify, Grains, Meats, Energy and Eurodollars spreads.
  7. Seasonal Spreads reflect underlying
    fundamental forces that have a high repetitively because they are based on climate.
    Good point Markus. That reminds me I think I will go to the
  8. J-Law



    I hadn't looked at the posts on spreads in awhile. The posts seemed to die down. But logged on & it looks like it has exploded !!!!!!!!!

    Your collection on rules of thumb for trading these instruments is well thought out and superbly put together. I myself used to daytrade for a prop firm down by the WTC and had after of watching screens day in and out decided that the approach while good for many was not for me. I learned alot and was in the process of categorizing what should & should not be applied to trading spreads. Your work tied up a great deal of loose ends.

    Before I got into equities I used to work on the Cotton exchange in the WTC. Working for the exch and then a local. Like yogi says "You can observe alot just by watching" It seemed that the spreaders (not too many down there, small mkts) A few in the FCOJ and CT pits were the consistent guys and had been down there forever.

    To me that speaks volumes about the approach.

    How do you like the Hawaiian islands ???? Used to live myself in the E. Caribbean. Island life is the DEAL !!!!!

    Thanks again,

  9. Last month we had a question about where Futures came from. Spreads and Spread Trading had to have started, when futures started, simply because every trade is either a spread against something of monetary value or something that can be exchanged for something of monetary value.

    When you are buying something you are long what you bought and short cash. Wall Street does not want you to see it this clearly, so they are always giving you results as though you are shorting some index or other arbitrary bench mark whenever you buy securities.

    Your investments are not actually gaining if they are performing better than some index and losing against cash. Wall Street is implying you are spreading against some benchmark when in reality you are really spreading against cash. All trades are in essence “Spreads against cash.”

    When Futures started, Spreading started!

    Leo Melamed on the origins of futures says "It is no simple task to pinpoint with any degree of exactitude the precise moment when the idea of futures and options was born."

    "Indeed, the idea of establishing forward availability of product as well as its future price was conceived at the dawn of mankind, perhaps at that inspirational moment just after Eve bit into the proverbial apple and then frantically sought to make a futures contract with Adam."

    [​IMG]"Clearly, the first recorded application of futures is Biblical, when Joseph outlined to the Pharaoh his plan for forward buy hedges in grain to protect the land of Egypt from the coming seven years of famine."

    "Ancient records are replete with proof that markets, utilizing elements of modern futures exchanges, were in existence throughout man's early history and in every corner of civilization. Sumerian documents, circa 3,000 B.C., reveal a systematic use of credit based on loans of grain by volume, and loans of metal by weight. Ancient records found in China, Egypt, Austria, and India are replete with rules and regulations pertaining to active commodity markets. In the city-states of Greece, market laws were in place to prevent manipulation. During the Roman period, there were nineteen trading markets in Rome called Fora Venalia that specialized in distribution of specific commodities, many of them brought from far corners of the earth by caravans. There were a host of medieval European seasonal festivals, the actual precursors to our modern exchanges, which evolved into important year-round markets, incorporating such features as self-regulation, business conduct, guarantee of contract fulfillment and mutual trust among merchants."

    "In the sixteenth century, in two opposite parts of the world, two similar techniques were created to deal with inherent risks of production and delivery: In London, the great commercial insurance syndicate of Edward Lloyd was born; In Osaka, Japan, the first rice futures exchange was founded. Later, as a result of increased international trade spurred by the industrial revolution, a system of to arrive forward purchasing became commonplace throughout the then commercial world."

    "Excerpted from a speech, by Leo Melamed."
    #10     Sep 23, 2003