Andy's Spread Trading Journal

Hi Andy, in your spread recommendations you give us a time window (i.e. 01/10 - 02/22) whenever the trade is seasonal. Do you recommend to enter the trade only between these two dates?

Seasonality doesn't always start and end at a precise date, and therefore the seasonal time window can be only a rough guess. Sometimes seasonality starts a month earlier or later, and sometimes you don't get the seasonal move at all. But if you want, you can do the following: start looking for an entry 10 days before and 10 days after the statistical entry date, and move your stop closer whenever you get close to the statistical exit date. Most important: Always look at the current chart. All statistics or charts about seasonality are only an additional help, but you can never base a trade only on the information of the past. Always trade what you see on the current chart!
 
Hi Andy, can you give me some ideas about how to calculate the risk for my spread trades?

Calculating the risk is a very important factor in trading. You can have the best trade selection but still lose money if you are sloppy in money management. How to calculate risk depends a lot on your general trading plan. Because you cannot have a stop loss in the market while trading spreads (only a mental stop), you should always look at the volatility of your spreads to calculate your risk. For example: Your mental stop for your spread is $200 away from your entry, but the spread you are trading usually moves $400 per day. Using only the $200 risk in your calculation of your contract size could be fatal for your trading account. Unfortunately, as it is so many times in trading, there is no “best way” in how to calculate the risk. Watch your spreads and see what make sense for you. Try to find your own way, but be consistent. Do not let gut feeling into your calculation. Be consistent in what you do!
 
Andy, how much time do I need every day for spread trading?

Andy: The trading itself doesn’t need much daily time. Approximately 10 – 20 minutes are required to check the charts each day, looking for new entries, checking your open positions, and giving your orders to the broker. Looking for the right trading opportunities needs much more time. Depending on the number of markets you want to trade, you will need several hours a week for your preparation. The most difficult part for a spread trader is finding the right trades out of hundreds of spread possibilities. Beginning traders find this part of spread trading especially difficult. Since you are a subscriber of "Traders Notebook," this part is much easier because I do the searching for you. But don’t think you have to take all the trade recommendations! You still have to select the trades that are right for you, the trades with “your name on them.” Those who don’t subscribe to a newsletter need to focus on only a few markets in the beginning, so that they don't get lost among all the spread possibilities.
 
Andy, do you typically use the 8-day low as a trail stop in your spread trades? If not, what's the significance?

I use it in addition to my "natural trailing stop". Sometimes the place for my natural stop (low of the last hook for example) is too far away and I need something else, so I use an 8-day low instead. I don't always use 8 days, sometimes just 6 days for fast moving spreads, and sometimes 10 days for slow moving spreads. To find out how many days fit best to my current spread, I just look at what happened in the past. I start with a 6-day lowest low, then 7, and so on. I am not overly worried about the precise number because I know that I am not able to find the perfect stop in any case.
 
Andy, what account size do I need to start trading spreads?

Andy: This is one of the “most popular” questions I answer almost every week. But without knowing the person, his/her trading abilities or financial situation, I am not able to give a precise answer. Without knowing all the details, I would say $10k is a starting point, $20k would be much better. Trading a small account means you have to risk a larger proportion of your money on each trade. When your account is larger, you can trade at least 2 lots or more and still be risking a smaller proportion of your account. When trading a small account, I suggest you stick to calendar spreads. They are less volatile, need less risk, and you will always get reduced margin. Later, when your trading account gets bigger and you are more experienced in spread trading, you can also look into inter-market spreads.
 
Hi Andy, can I place spread orders at the e-CBOT or any other electronic market?

I don’t know if this is true for all electronic markets, but I will try to explain the basic information for spread orders in electronic side-by-side markets.

Intra-market spreads (i.e. W - W or ED - ED) are possible. Depending on your trading platform, you can execute the order directly at the exchange or via your broker. Other platforms (for example Xpress) will allow you to send the order to the order desk, and someone there will place your order into the electronic trading system. In this case, even if your order is placed into the electronic market, you will have delays on your fills or any other confirmations. It is important to know that your spread order will also be executed if both legs of your spread are able to get filled. For example, you want to sell the spread X – Y at a premium of 10. If the exchange trading system can make sure you get filled on both sides with a difference of 10, it will lock in both trades for both legs and execute them simultaneously.

You will probably run into problems when you try to place an inter-market spread like S – W. So far, most trading systems will not allow inter-market spreads. You will need to "leg in," that is place the order for each leg separately, in such an inter-market spread.

It is a always a good idea to talk with your broker regarding how to place these orders in the electronic markets.
 
Hi Andy,

I've become very intrigued with spread trading. How much has your ROI per year been seen you've started this journal?

thanks,

Walt
 
Hi Walt,

you know, it is difficult to name any numbers. It is always related to the risk you are willing to take. I am very conservative, not risking more then 2% - 3% of my account on each trade. With this number you should be able to get 30% - 50% a year on average.

Spread trading is not very known, I know. But I can recommend it to every trader. It is a very constant way of trading, even in such turbulent times like we have in the grains at the moment. Spread trading has always been good to me. :-)

Happy trading,
Andy
 
I've been reading upon Joe Ross' material on spread trading. However, it comes across as one big infomercial to me. He highlights the astronomical ROIs, while stating that the risk is minimal. I've had some success with spread trading the crude oil. I chose CL because of the backwardation. What I am looking for is a software application that can create the range of any given futures pair (i.e. calendar or inter-related pairs like gas and oil). Are you aware of any such software application?

Thanks,

Walt
 
Walt,

the ROI discussion is not an easy one. What Joe is talking about is mainly the profits comparing to the required margin. And in this case he is right. With many spreads (not with all of them) you can make nice money comparing to the money you have to put on the table regarding margin.

The risk discussion is also not an easy one. You can trade so many different spreads, starting with low risk calendar spreads in the same crop year, up to high volatile spreads like the wheat - soybean one at the moment.

Regarding the software, it depend on your needs. You can look at Nextrend, they charge only $15/month for delayed data. But you can not get real time. Or you look into the Genesis software, I personally like a lot, because it has many features like seasonal analysis.

Happy trading,
Andy
 
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