filter for seasonal spreads

TraDaToR

TraDaToR

Hello,

I am dabbling in seasonal spreads lately. I studied a lot of calendar spreads over years of daily datas in ags, meats, metals and energy and I finally made a selection based on consistency of returns.

It seems seasonal spreads are best working in bearish/stagnating/slightly bullish outright scenario with contango, and poorly working in a 2008 style exploding inverted market . A lot of MRCI spreads featured in their encyclopedia had an awful year in 2008 because of this, so I apply a filter on "exploding markets" before taking a trade. Do you agree with this?

Do you see an other filter I should apply( fundamentals, cost of carry...)?

Thanks a lot.:)
 
Quote from TraDaToR:
----seasonal spreads....
----ags, meats, metals and energy....
----A lot of MRCI spreads had an awful year in 2008.....
----Do you see an other filter I should apply.....
More...
1) Bull-spreads ought to occur in rising trends and bear-spreads ought to occur in declining trends.
2) Be more careful with metals and energy because they have been behaving more like "financial" commodities instead of "physical" commodities. :cool:
 
Quote from nazzdack:

1) Bull-spreads ought to occur in rising trends and bear-spreads ought to occur in declining trends.
2) Be more careful with metals and energy because they have been behaving more like "financial" commodities instead of "physical" commodities. :cool:
More...

Thanks Nazzdack, I understand 1) because the front month is the most volatile, but from what I have tested, there can be profitable seasonal bull spreads even in bear markets whereas it is hard to find a profitable seasonal bear spread in a "real" bull market. Declining /stagnating markets seems better for spreads in general, bull and bear. Does that make sense?

An other thing I noticed is that usually across all commodities most bear spreads must be done before 1 month to expiration and bull spreads take place in the final period, just before first notice and even more after( but you can't trade as you don't want delivery of the front month). It's really clear on metals.
 
I've been working on applying technical analysis as a entry/exit filter; mostly pretty basic stuff like support/resistance, breakouts, breakdowns, etc. Also looking to get a feel for RSI and had some success here, but not developed yet into a full "system". I've tended to have more success in some markets than others. For example, corn has been ok, not volatile, wheat has been a dog, but I suppose because of the carrying costs, so I stay out of the wheat calendar trades, simply because there's not enough volatility.
Another filter I've been using is too much volatility. For an account my size currencies and some of the metal spreads just have two much daily movement, even for 1 lot. Been burned on this one a few times....
 
Quote from TraDaToR:

Hello,

I am dabbling in seasonal spreads lately. I studied a lot of calendar spreads over years of daily datas in ags, meats, metals and energy and I finally made a selection based on consistency of returns.

It seems seasonal spreads are best working in bearish/stagnating/slightly bullish outright scenario with contango, and poorly working in a 2008 style exploding inverted market . A lot of MRCI spreads featured in their encyclopedia had an awful year in 2008 because of this, so I apply a filter on "exploding markets" before taking a trade. Do you agree with this?

Do you see an other filter I should apply( fundamentals, cost of carry...)?

Thanks a lot.:)
More...



You need to think less like a "trader" of commodity spreads, and more like an "economic user" of commodity spreads.
 
@Gianthogweed, I do use technicals too to enter at the optimum date +/- 4 days. I just look at the current trend, candlesticks and try to get a better entry out of it.

@Il principe, what is an economic user of a spread basing his trades on?
 
Quote from TraDaToR:

Hello,

I am dabbling in seasonal spreads lately. I studied a lot of calendar spreads over years of daily datas in ags, meats, metals and energy and I finally made a selection based on consistency of returns.

It seems seasonal spreads are best working in bearish/stagnating/slightly bullish outright scenario with contango, and poorly working in a 2008 style exploding inverted market . A lot of MRCI spreads featured in their encyclopedia had an awful year in 2008 because of this, so I apply a filter on "exploding markets" before taking a trade. Do you agree with this?
More...

I applaud you on your interest in this topic. But my question would be, what is your method of analysis? Do you just have a gut feel? Or did you actually segment a large number of these spreads into different categories, and prove statistically that some under/outperform under the conditions you have described here?

Without knowing what you did and how rigorous your method, it is hard to know whether to agree with you or not.
 
After having read 3 books on the subject( Courtney Smith, MRCI encyclopedia and Schap ), I knew the basics but I had to do some statistical studies.

So I used daily spread settlements on MRCI website to test all the encyclopedia spreads( which was written in 2005 ) on 2006, 2007, 2008, 2009 datas. The results were extremely bad just because of 2008, so that's why I think big bull markets are bad for spreads...Some spreads had been working 100 % of years for 25 years before 2008.

After that , I subscribed to scarr trading website to find my own spreads and simply used seasonal charts over different decades to find consistent trends/patterns, verify it made sense fundamentally and created a calendar of "proprietary" spreads.

So far the results are good but I have only been trading it for one month.
 
Quote from TraDaToR:

Some spreads had been working 100 % of years for 25 years before 2008.

Keep in mind, a lot of the seasonal things that "worked for 25 years" are simply curve-fitting. Seasonals may have value, but you are seeing the cream out of a huge population of trades that did not make it. You need to factor

After that , I subscribed to scarr trading website to find my own spreads and simply used seasonal charts over different decades to find consistent trends/patterns, verify it made sense fundamentally and created a calendar of "proprietary" spreads.


FWIW, http://seasonex.com/ is another one of these sites.
 
Quote from TraDaToR:

@Il principe, what is an economic user of a spread basing his trades on?

1.) Fundamental analysis - SnD, Import/Export parity levels, stock carry-over levels from previous crop year, quality issues, transport issues, meteorology.

2.) Cash margins: Soybean crush, for example.

3.) Open interest levels for each leg

4.) Spec holdings(vs commercial holdings) for each leg

A.) An "economic user" is, in general, a manufacturer who would be short a nearby(against a commodity purchase from a supplier) and long a deferred(against a commodity sale to a customer). He'd be bear-spread and thus using futures(paper) to manage the gross margin of the physical(cash) business. If this spread continues to weaken(become more negative), that would be more paper profit in his pocket; opposite would occur if the spread strengthens. And generally, he would use the above 4 bullets to manage this, along with historical spread charts as a guide.

B.) However, with most commods(except metals) the weather is a major wild card and can blow short-term holes in a previously stable spread relationship. Another factor is quality; you may have adequate supply, but the quality is dogshite(see N/U & U/Z in LDN cocoa).

C.) I'm not trying to discourage you from looking into this statistically because there are seasonal patterns. However, spread values tend to be floaters, not movers and don't really react to a TA impetus. Spreads are "big picture" trades and understanding some of the fundys will give you better and more robust trading parameters
More...
 
You must log in or register to reply here.
Back
Top