Andy's Spread Trading Journal

I'm sorry Andy, but I don't have the details any longer, but it was a crude oil spread between June & August. However, hopefully you can help from a conceptual point of view. How do you manage a spread that goes from contango to backwardation, or visa versa, when you've already entered your positions?

Thanks,

Walt

Quote from Jordan_Andy:

Please let me know the spread, Walt!

Andy
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Hi Walt,

all you can do in such a situation is to trade your spread regarding your initial plan. You never know what will happen.

I don't think it is a major event whenever a spread goes into backwardation. It is important what will happen then. Will it move even deeper into backwardation or will it drop back in "normal" area.

Unfortunately, we never know in front what will happen.

Whenever I enter a spread I define my initial risk and stop. At the moment the spread moves into my direction I use a trailing stop. That's it.

Until now, I haven't found anything else a trader can do. :-)

Happy trading,
Andy
 
Andy, in your opinion, what are the advantages of spread trading.

I think there are quite a few advantages of spread trading. Besides the ones you can read on our web site (www.spread-scan.com), I will name a two more:

Spread trading is long term trading: In my opinion trading becomes more difficult as the time frame you use for trading becomes shorter. Spread trading is position trading and mainly based on daily charts. The trades go from a few days up to a few weeks or even a few month.

No stop orders in spread trading: This is something that scares many outright futures trader. There are no stop orders for spreads and you have to use a mental stop for your spreads. But the advantage is, no one can run your stop. Stop running is a major problem when trading outright futures. It happens very often that the market moves up and down a lot during the trading day to take out all the stops just to end at the same level as the open.
 
Andy, nowadays almost all markets are electronic. Do you use the electronic or the open outcry market when you trade spreads and how do you enter/exit your spread trades.

I am using mainly electronic markets when I trade spreads. There are only a few markets where the volume in the pit contract is higher then in the electronic market. The meats at the CME are such a market. But as long as the volume is higher in the electronic market, I prefer the electronic market over the open outcry. There are several advantages using electronic markets:

- You have constant information about the bid and ask price. In open outcry you get this information very seldom (and if you get it, you can not be sure if it is correct).
- You get your fills immediately. It is just a matter of a second till you get your fill confirmation. In some open outcry markets you wait sometimes up to an hour or even more.
- Commission is much lower for the electronic markets.
- You don’t have to call your broker or trading desk to place your order. You can do everything online. (Please note – you have to be careful whenever you use the electronic platform, especially on the beginning. There is no one double checking your orders.

When trading spreads using the electronic contracts, I prefer to enter and exit my spread trades around the close of the pit session. In the open outcry market I used to give MOC (market on close) orders because of good liquidity around the close. But this type of order doesn’t exist in electronic markets. Therefore, we have to “simulate” MOC orders buy giving market orders in the last 3 minutes before the close.
 
Quote from Jordan_Andy:

Hi Walt,

my spread traders are mainly based on seasonality together with chart reading.

Regards,
Andy
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Thanks Andy...

Iguess seasonality has its merits; however, so many unique variables (i.e. the weather or some geo-political occurrence) can disrupt the expected seasonal spread relationships. I am currently using a mean reversion technique with Crude Oil. Although I am now profitable with this spread that I've been in for about 2 weeks, I notice that the daily difference in the spread has been fluctuating from 0.12 to 0.30. With 10 contracts, my profits have been fluctuating between $4k & $1k. It seems that I may be leaving a lot of $$ on the table. Although the slippage eats into the profits, I guess that there are daytrading opportunities with futures spread trading. What do you think?...

BTW, are you doing any one-one-one mentoring?
 
Nowadays with all the volatility you will easily find some spreads for day trading.

Slippage can be a problem of course because of the missing liquidity.

I have never been much into day trading spreads. I think the most money can be made with swing or position trades.

Seasonality of course is not the holy grail. But it can definitely help to filter out some trade possibility of all the hundreds of spreads available. Seasonality can never be the mandatory reason to enter a trade of course. You always need to look at the complete picture.

If you need some mentoring, just get in touch with me. Maybe I can help.

Have a nice weekend,

Andy
 
Question: Andy, what do you think have been the most important changes in the markets in the last few years?

Answer: As you might have noticed, you can now trade almost all products in the electronic markets. You can trade the Grains at the ECBOT, the Softs at the ICE, and so on. BUT you should always double check to make sure you are trading the right product at the right market. The volume can be very different between the markets, and it is not always easy to keep an overview. If you are not sure what to trade, pit or electronic, check the volume and talk to your broker.

But that’s not all. All the ECBOT products will move to the Globex, the Emini Russell 2000 will move completely to the ICE by September ‘08, and they will reduce the tick size for the T-Bonds. As you can see, a lot has happened and is still happening. Just make sure you know what you trade; check the product description at the exchange. Make sure you have enough volume in the contract month you want to trade.
 
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