Spread Trading multi-positioning trading strategie!

[jeffm]

Just to stir the tanks on this thread...

Here is the seasonal spread chart for LHG4/LHZ3:
<img src="http://www.team1internet.com/jeff/0339-2d.gif">

Looks like a textbook setup. What would you look for as an entry trigger? The spread already has momentum. Waiting for a pullback to enter may mean you miss the trade entirely if it performs like the 5 or 15 year avg.

We're also quite a way up from the 9/10 bottom (the best place for the stop). Where does the spread go to show you you're wrong?

-Jeff

 

[-ooO-(GoldTrade]

Looks like a textbook setup. What would you look for as an entry trigger?

Look for a Stochastics signal or at least for Sto to turn up. Which it did in this case, before our usual seasonal window?

There was a “bullish divergence,” on that last washout in prices. Unfortunately, the WSC does not give us the spread that far before the seasonal window anymore. So all we could do was take it when he gave it.

jeffm> The spread already has momentum.

Let's see when it hits new highs.

jeffm> Waiting for a pullback

You are trading Seasonals, this is the strongest month for this spread. There certainly could be a pull back. But don't expect it. Don’t wait, if the trigger has already been pulled, you should already be in. If you are scared just get in and run a trailing stop of some kind or use the stop that has been computer tested for you. Trendlines are support lines. This one is steep. It could be hit on any sideways movements and you would still want to be in.

jeffm> to enter (late) may mean you miss the trade entirely

Good point. These trades may be long-term trades as far as Commodities goes, but they are short in duration as the calendar goes. Often these things take off right from the start and keep right on going.

jeffm> if it performs like the 5 or 15-year avg.

If it does there may be two, maybe three opportunities to average up.

jeffm> We're also quite a way up from the 9/10 bottom

The way I read it, we were expecting a bottom about then. The thing is the next bottom did not occur because the market was too strong. The market was acting in a bullish manner. More reason to get on board.

jeffm> (the best place for the stop).

Oh! is that where the computer says the stop is supposed to be?

jeffm> Where does the spread go to show you you're wrong?

Never let a profit turn into a loss!

 

[jeffm]

Question about exits; both the good kind and bad kind

First the bad: stops. The stops listed by MRCI for their spread trade ideas are just a money management stop. They take the avg trade profit over the 15 years, multiply by 1.3 and use that as a stop. Is that good enough? Versus choosing a stop based on the chart action?

Now the good exits...profit targets. Look at this chart:
<img src="http://www.team1internet.com/jeff/sfzcdz.gif">

MRCI will hold the trade til mid-October, when both the 5 and 15 year charts clearly show the high at Oct 1. Why hold onto the trade for an extra 2 weeks, sitting through a predicted drawdown, hoping to just get back to where you were Oct 1?

-Jeff

 

[-ooO-(GoldTrade]

That is a real good question Jeff. Why not email it to Jerry and post your reply. I think I know why but would love to hear it from the top!

How did you like Jerrys recent lesson in "Futures Magazine!"

 

[-ooO-(GoldTrade]

Hcour> follow seasonals because they worked "most of the time" then it would seem we'd all get rich which means we'd all go broke cause then they'd cease to work as trading vehicles of course.

If more traders traded spreads it would increase the liquidity and possible reduce the volatility. Someone would still be needed to offset the commercial traders. As long as we have an economic function there will still be profits. When the volatility is reduced the margins will shrink. So profits can still be engineered into the game to attract new players.

Hcour> I'm considering the seasonals the way one would a scan, to find possible trading candidates, then filtering them thru various criteria to find the best trading vehicles.

Very good idea. I think Ross wrote a book on it.

Hcour> Moore Research has about 12 spread seasonals a month so I'd start w/those.

Jerry Topeke the editor of Moore Research further increases your odds by examining two upcoming spread strategies each week. Jerry reviews their seasonal dynamics, provides current fundamental and technical perspective, and discusses their potential risk/reward and any relevant alternative trading ideas. You might want to start with these.

Hcour> Or maybe I might just look at "classic" seasonals that can be found in books like Thomas Kallard's.

Now you are going backwards. MooreÕs data includes all of these and is Moore current.

Hcour> Or one might look at Bull/Bear interdelivery spreads.

Do you think Moore left those out?

Hcour>The spread should show itself to be "well-behaved" from a TA point of view

Gee all I ask is that it goes up when I own it. It should not matter what it does outside of the seasonal window.

Hcour> The spread should be coming out of a consolidation, much as a regular market.

The big squeeze of Bollinger bands will show you that. Seasonals do not need to show signs of accumulation to blast off like a rocket.

Hcour> This gives the spread time to "build a cause" for the next move.

Seasonals do not need to Òbuild a case,Õ in this years price action. When the window opens they often just take off. The base period is the preceding fifteen years.

Hcour> It may be a reversal or continuation consolidation pattern or trading range.

Could be, Not required.

Hcour> Both the longer-term (15 yr) and shorter-term (5 yr) seasonal should be consistent w/each other and the current spread following both during the trending phase that precedes.

If it was that far off, Moore would not even let you see it. They are already showing you the best two out of thousands of spread combinations.

Hcour> The duration of the projected trend to hold the position should be 3 wks or longer.

You can sit them out, most are about six weeks, and some are two. Many times we get a long term followed by a short-term pyramid. The pyramid might be two weeks and offer higher profits per day. Higher return on margin. Why would you want to exclude these?

Hcour> Then there are the underlying markets that makeup the spread, comparing them using Wyckoff Relative Strength analysis:

Anything there is to know about the underlying markets is shown in the spreads differential. This is the basis of technical analyses.

Hcour> I'd want to see the individual contracts first consolidate in some fashion and then reverse or continue along w/the spread.

Suppose the prices outside of the window do not conform to this precise outlook. Do you plan to just sit on the sidelines when a trade takes off?

Hcour> This is what happened in the Feeder Cattle/Live Cattle spread that I've been following in my FC/LC thread, if you're interested.

Well forgive us if all spreads do not behave like sheep.

Hcour> One can see this especially in bull/bear interdelivery spreads at tops and bottoms.

For the new traders among us what does interdelivery mean?

 

[hcour]

>> Hcour> follow seasonals because they worked "most of the time" then it would seem we'd all get rich which means we'd all go broke cause then they'd cease to work as trading vehicles of course.

>> If more traders traded spreads it would increase the liquidity and possible reduce the volatility. Someone would still be needed to offset the commercial traders. As long as we have an economic function there will still be profits. When the volatility is reduced the margins will shrink. So profits can still be engineered into the game to attract new players. <<

In other words they don't work "most of the time".

>> Hcour> I'm considering the seasonals the way one would a scan, to find possible trading candidates, then filtering them thru various criteria to find the best trading vehicles.

>> Very good idea. I think Ross wrote a book on it. <<

Haven't read it. I'm not writing a book, lecha know if I do.

Is he the same Ross that lives on selling the RH, which everybody else for a hundred years has called a pullback or retracement?

>> Hcour>The spread should show itself to be "well-behaved" from a TA point of view

>> Gee all I ask is that it goes up when I own it. It should not matter what it does outside of the seasonal window. <<

Yes, this goes back to "most of the time". I'm looking for consistency according to my criteria based on basic TA, as I would in any market, to put the odds in my favor. Do your own thing.

>> Hcour> The spread should be coming out of a consolidation, much as a regular market.

>> The big squeeze of Bollinger bands will show you that. Seasonals do not need to show signs of accumulation to blast off like a rocket. <<

No market does. Anything can reverse on a dime. This does not fit my criteria. I'm looking for consolidation to prepare the move. Spreads do that too.

All I have time for for now...

Harold

 

[-ooO-(GoldTrade]

Wiest has a system that breaks all of the rules, but still makes profits. His premise was similar to yours. But of course seasonals work all the time. They will always be lowest at harvest. If you had the capital to trade multi year trends like some of my teachers do you would never have a losing trade.

Most of us speculators run on considerably less margin. So, drawdowns are a significant factor. JerryÕs letter is a sub of MooreÕs letter. It makes life easier by providing less information.

KallardÕs is for conceptual study. The spreads are out of date. For example they do not take into account the markets action after 911 or the recent wars. Bollinger works sometimes, I donÕt wait for it. Stochastics tells you ahead of time.

Jerry told us seasonals do not need to build a base. When they test with computers this in not a variable. Base building is out. Trade it the way it is tested MOC etc. when you are seeking similar results. Ross in ÒSpreads & Seasonals,Ó teaches us to disregard TA more than 10 days away from windows entry or exits.

Sometimes we are grabbing a small window contained within a bigger window. Say for example prices are more or less going up for six months steady. We may be jumping in for the most reliable six-week thrust. The base may be months before. The seasonal thrust can come during an uptrend, downtrend, or no trend at all.

Tharp explains how the more restrictions you require the more trades you are going to flat out miss. ItÕs in the numbers. After all this is speculation!

>> Hcour> they worked "most of the time"

Seasonals always work. Harvest is the realm of maximum supply. Maximum supply leads to lower prices. JakeÕs ÒSeasonality,Ó shows why farmers must sell at the lowest prices to commercials that control the market. This is how it works.

>> As long as we have an economic function there will still be profits.<<

In other words they don't work "most of the time".

Seasonals work seasonaly. All of our trades do not work. Seasonals are caused by climate. Long-term climatic changes are very gradual. They do not harvest grains or birth Cattle in January.

>> Hcour>The spread should show itself to be "well-behaved" from a TA point of view

Sure seasonal charts are just another TA study. No more no less.

Yes, this goes back to "most of the time.Ó I'm looking for consistency according to my criteria based on basic TA, as I would in any market, to put the odds in my favor.

Tharp shows us how to pull profits out of random number sequences. ÒMost of the time,Ó is better than that!

>> Hcour> The spread should be coming out of a consolidation, much as a regular market.

>> The big squeeze of Bollinger bands will show you that. Seasonals do not need to show signs of accumulation to blast off like a rocket. <<

How many seasonal spreads come out of a consolidation?

Will you miss this years big ones that do not?

It only takes one or two big trades a year to make trading worthwhile.

I'm looking for consolidation to prepare the move. Spreads do that too.

A quick look at charts will show, that accumulation is not a necessary condition for quick, big moves in seasonals.

 

[hcour]

You make some interesting points (and this time w/o the nasty sarcastic undertone). If this method works for you and others more power to you. But I could never simply just trade on someone else's signals, and you can post a million statistics but I'm still skeptical of trading seasonals mechanically. That's just moi. I have to do the dd myself and find my own style. I've only been studying this for a few months, it may turn out to be viable, it may turn out to be crap, I'll have to find that out for myself. Certainly some aspects, like watching the individual contracts RS to each other as the bull spread rolls over to a bear spread at tops and vice-versa at bottoms, is legitimate and worthwhile.

As for missing the big moves, perhaps so, I'll take them when I can get them. But I'm happy hitting the singles rather than swinging for the homeruns.

Thanks for your comments,
Harold

 

[-ooO-(GoldTrade]

Aloha Dmitri and other new traders to spreads,
A good guide line for new traders is:

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

My name's Dmitri.
I read spread trading doesn't require huge capital to start, so how much do you recommend to start to trade spreads?

You can trade spreads on a shoestring. Your returns on margin (ROM) will be tremendous. I use the Livermore philosophy of trading, where in, we add to winning positions, usually in equal or lesser position size. It is OK to trade one calendar spread with the trend.

Here in the USA you can open an account with less than three thousand dollars. You can start treading one spread easily. When it moves in your favor you can average up keeping double margins or whatever suits your fancy.

The quickest way to lose a large about of money is to start with a large amount. When you get a seasonal windfall. Take your original capital out and spent it. Trade with the houses chips (rule one for trading on a shoestring).

Some of the rules that related to money management on a shoestring from above are.

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

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. Run a trailing stop.

-ooO-(GoldTrader)-Ooo-