Seasonal spreads
- Thread starter hrokling
- Start date
Hi Britefire:
That's a great name by the way. I flipped three times between C and D. I always follow the price. I showed only A, B, C and D price points to make my idea of flipping clearer and more comprehensible to Meadowz and the rest of you on the Thread.
22 years of experience and a proprietary trading system that took me 20 years to develop and perfect gave me the confidence.
Have a great holiday.
Hi Britefire:
By the way, I traded the NOB Spread ZNU7 - ZBU7 and hence, the flipping was done on that spread and not on ZNZ7 - ZFZ7. The pattern of both spreads are close enough. The ZNZ7 - ZFZ7 was what was at play on this Thread and I was demonstrating to you all that you can trade in both directions and not just one.
Status update as of August 31st
The close for the spread in Soybean was a bit lower than expected - it traded higher all of Friday. It was however significantly lower during the peak in Wheat and Soybeans earlier this week, so I guess it's ok - but I sure could have gotten a much better entry.
I've included all the skipped trades as well, they're listed with a blank P/L. Further out on my spreadsheet I've got a column which tracks what the difference would have been in P/L if I'd followed the position sizing system I worked on earlier this summer. Including the skipped trades, it would have been an additional 18.000 usd! However, there are still a few things which just aren't right in that system - and it mainly provides way to aggressive size in energies.
The close for the spread in Soybean was a bit lower than expected - it traded higher all of Friday. It was however significantly lower during the peak in Wheat and Soybeans earlier this week, so I guess it's ok - but I sure could have gotten a much better entry.
I've included all the skipped trades as well, they're listed with a blank P/L. Further out on my spreadsheet I've got a column which tracks what the difference would have been in P/L if I'd followed the position sizing system I worked on earlier this summer. Including the skipped trades, it would have been an additional 18.000 usd! However, there are still a few things which just aren't right in that system - and it mainly provides way to aggressive size in energies.
I promised to write a bit more about the system I'm working on, so I thought I'd start off at the probably least likely place 
:
PROFIT TARGETS
PT = (Avg. historical Net Profit) + (Avg. historical Maximum Favourable Excursion)
Based upon 20 years of data if possible, or less if that's all you got. The trades have similar entry and exit dates, in the style provided by MRCI. The Avg. historical MFE does not take into account years which did not have a positive MFE. So if a period of 20 years had two years with the spread constantly in the red, the 18 MFEs are added together and divided with 18.
It's not realistic to reach this profit target every single time, but I think this is definitely a place to take "windfall profits" so to speak. I look at this profit target as the absolute maximum you should be expecting (hoping) to get out of the trade.
On intramarket spreads I usually just leave a limit order in at this level.
I am happy with this calculation, and don't inted to change it anytime soon although I will continue in general to work with exit strategies.
:PROFIT TARGETS
PT = (Avg. historical Net Profit) + (Avg. historical Maximum Favourable Excursion)
Based upon 20 years of data if possible, or less if that's all you got. The trades have similar entry and exit dates, in the style provided by MRCI. The Avg. historical MFE does not take into account years which did not have a positive MFE. So if a period of 20 years had two years with the spread constantly in the red, the 18 MFEs are added together and divided with 18.
It's not realistic to reach this profit target every single time, but I think this is definitely a place to take "windfall profits" so to speak. I look at this profit target as the absolute maximum you should be expecting (hoping) to get out of the trade.
On intramarket spreads I usually just leave a limit order in at this level.
I am happy with this calculation, and don't inted to change it anytime soon although I will continue in general to work with exit strategies.
STOP LOSS / TIMESTOP
Initial SL = (Avg. Maximum Adverse Excursion) * 3
The Avg. MAE is again based upon 20 years of historical data, with years that have constantly been profitable left out. So if 5 out of 20 years have been in the black all the time, you take the max drawdown of the other 15 trades and divide it by 15.
This creates a very wide SL. We then add to the equation the number of days you've been in the trade as well as the total number of days the spread is intended to take.
SL = (Spread entry price) - (Initial SL - (Initial SL * 2) + (Initial SL / Total Number of Trade Days * Days Into Current Trade * 2) )
This creates a Timestop which moves the SL up as the trade progresses. After you've reached half the intended time in the trade, the SL is at breakeven. As you get closer and closer to the exit date you're getting more and more likely to get stopped out, similar to a trailing stop.
The number of days a trade lasts and has lasted so far includes weekends as well, so it's not totally accurate. I'm just subtracting dates in Excel. I think this can be argued both ways, after all we use gasoline and wheat is growing even on a Sunday.
If this SL gets violated, I'm not 100% mechanical about getting out straight away. However it's a big red flag especially in the beginning, and I start looking for a way to get out by watching it closely and getting out on a bounce or something. So the management is discretionary.
It's worth noting that on trades with a short duration (2-3 weeks) this might be a little crude. For a 2-3 month spread I think it makes more sense and works a lot better.
Initial SL = (Avg. Maximum Adverse Excursion) * 3
The Avg. MAE is again based upon 20 years of historical data, with years that have constantly been profitable left out. So if 5 out of 20 years have been in the black all the time, you take the max drawdown of the other 15 trades and divide it by 15.
This creates a very wide SL. We then add to the equation the number of days you've been in the trade as well as the total number of days the spread is intended to take.
SL = (Spread entry price) - (Initial SL - (Initial SL * 2) + (Initial SL / Total Number of Trade Days * Days Into Current Trade * 2) )
This creates a Timestop which moves the SL up as the trade progresses. After you've reached half the intended time in the trade, the SL is at breakeven. As you get closer and closer to the exit date you're getting more and more likely to get stopped out, similar to a trailing stop.
The number of days a trade lasts and has lasted so far includes weekends as well, so it's not totally accurate. I'm just subtracting dates in Excel. I think this can be argued both ways, after all we use gasoline and wheat is growing even on a Sunday.
If this SL gets violated, I'm not 100% mechanical about getting out straight away. However it's a big red flag especially in the beginning, and I start looking for a way to get out by watching it closely and getting out on a bounce or something. So the management is discretionary.
It's worth noting that on trades with a short duration (2-3 weeks) this might be a little crude. For a 2-3 month spread I think it makes more sense and works a lot better.
POSITION SIZING
I calculate the factor EQT, which is the required capital per contract:
Margin = Maint. Margin Requirement (from exchange websites)
Range = Avg. MFE - Avg. MAE
Avg MAE is a negative number, so - and - becomes +. This is calculated as shown under PT and SL.
EQT = (Margin * (Range / Margin) + (Margin / 2) / ((Avg. MFE + Avg. Net Profit) / 2 - Avg. MAE) * 0.6)
The 0.6 factor is a number chosen to correspond with the aggressiveness I want. Increased further, it becomes more aggressive.
The current account size is then split into 10, as I'm holding many positions simultanously. Sometimes it's only five, but I do believe it's been more than 10 as well. Of course both the 10 I'm using here and the 0.6 play into the aggressiveness, so this could of course be combined.
So, the 1/10 of the account size is allocated to a particular spread. You then divide the available account size with the required EQT to get the number of contracts (which you round DOWN).
Obviously, the bigger account the more accurate the position sizing is.
As mentioned, I'm not 100% satisfied with this yet as it sometimes becomes too aggressive for my liking. Also, the strangely low spread margin requirements in energies affects it.
I calculate the factor EQT, which is the required capital per contract:
Margin = Maint. Margin Requirement (from exchange websites)
Range = Avg. MFE - Avg. MAE
Avg MAE is a negative number, so - and - becomes +. This is calculated as shown under PT and SL.
EQT = (Margin * (Range / Margin) + (Margin / 2) / ((Avg. MFE + Avg. Net Profit) / 2 - Avg. MAE) * 0.6)
The 0.6 factor is a number chosen to correspond with the aggressiveness I want. Increased further, it becomes more aggressive.
The current account size is then split into 10, as I'm holding many positions simultanously. Sometimes it's only five, but I do believe it's been more than 10 as well. Of course both the 10 I'm using here and the 0.6 play into the aggressiveness, so this could of course be combined.
So, the 1/10 of the account size is allocated to a particular spread. You then divide the available account size with the required EQT to get the number of contracts (which you round DOWN).
Obviously, the bigger account the more accurate the position sizing is.
As mentioned, I'm not 100% satisfied with this yet as it sometimes becomes too aggressive for my liking. Also, the strangely low spread margin requirements in energies affects it.
hrokling,
Congratulations to your results. I think you started with an equity capital of $20,000 but later increased it up to $50,000? But even with $50,000 that would represent a 40% ROI in 4 month or 120% annualized - wow - you are going to beat Warren Buffet by a wide margin if you can keep it up over the next 30 years or so, his Internal Rate of Return over his investment career is quoted at around 27% per annum. But joking aside, I wish it would continue this way, if it were, word would get around and everybody would jump in on it, that alone would put and end to it, but we will keep watching you for the next 30 years or so
I had some outsized returns myself on the interest spreads in August and also in the currencies, the two markets I thought would be the bottom performers. But now I am not so sure about my interest positions and have to ask some gurus for help.
Congratulations to your results. I think you started with an equity capital of $20,000 but later increased it up to $50,000? But even with $50,000 that would represent a 40% ROI in 4 month or 120% annualized - wow - you are going to beat Warren Buffet by a wide margin if you can keep it up over the next 30 years or so, his Internal Rate of Return over his investment career is quoted at around 27% per annum. But joking aside, I wish it would continue this way, if it were, word would get around and everybody would jump in on it, that alone would put and end to it, but we will keep watching you for the next 30 years or so
I had some outsized returns myself on the interest spreads in August and also in the currencies, the two markets I thought would be the bottom performers. But now I am not so sure about my interest positions and have to ask some gurus for help.
FullyArticulate,
I briefly glanced over some of your posts on other threads and saw that you are very knowledgeable and experienced in the field of interest spreads among other things.
Not too long ago I posted my Eurodollar positions like Dec08/Dec07 or Sep08/Sep07 with the remark that they not only show a great seasonality pattern but should also do well in a declining interest environment - that was inaccurate because it depends on the shape of the yield curve. Presently the 6 month Libor rate is lower than the 3 month, in other words an inverted yield curve, that would justify my present positions of buying the longer maturities over the shorter ones and indeed I have nice open profits in my positions.
My question is: If we now anticipate a rate cut by the Fed would that not cause a steepening of the yield curve? (short rates going down and long rates remaining the same or even going up because of inflation fears). If so, in your opinion, is it time to get out of those spreads or even look for a reversal?
Another question, does the same logic apply to the ZN Dec07/ZF Dec07 spread.
Any help from you or any other interest guru would be greatly appreciated.
I briefly glanced over some of your posts on other threads and saw that you are very knowledgeable and experienced in the field of interest spreads among other things.
Not too long ago I posted my Eurodollar positions like Dec08/Dec07 or Sep08/Sep07 with the remark that they not only show a great seasonality pattern but should also do well in a declining interest environment - that was inaccurate because it depends on the shape of the yield curve. Presently the 6 month Libor rate is lower than the 3 month, in other words an inverted yield curve, that would justify my present positions of buying the longer maturities over the shorter ones and indeed I have nice open profits in my positions.
My question is: If we now anticipate a rate cut by the Fed would that not cause a steepening of the yield curve? (short rates going down and long rates remaining the same or even going up because of inflation fears). If so, in your opinion, is it time to get out of those spreads or even look for a reversal?
Another question, does the same logic apply to the ZN Dec07/ZF Dec07 spread.
Any help from you or any other interest guru would be greatly appreciated.
I haven't increased the capital and just use initial capital and profits until the end of this journey. The initial capital was only about 15.000 usd (if you look at the first post I made, 1.500 per spread - and I have ten portions of capital) and the return is now 130% including open profits. Annualized it's around 900%, which is pretty incredible (if I'm not mistaken, that is - I'm not math educated). The trick is rather to do this for 30 years in a row and of course getting good fills when you're trying to get 1000 spreads in RBOB lol