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Spread
Scan Issue: October 16, 2006 - Volume 114
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Joe Ross Spread Trading Newsletter.Each week we present spread trading examples and opportunities in order to help you become a more professional spread trader.
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Spread charts provided by Moore Research Center, Inc. (800) 927-7259, www.mrci.com
Today we consider an intra-market meats spread: long June 07 Lean Hogs and short December 06 Lean Hogs (LHM7 – LHZ6). The optimized statistical time window regarding entry and exit is from 10/10 till 10/27 (yellow area). It seems this year the spread is behaving a bit differently. Since making a low in September, the spread has been in a nice up trend. Can seasonality help to move the spread even higher?
Traders may want to enter the spread a value of 9.15. Margin for the spread is $675 (reduced margin). Suggested risk is $400. Initial projected objective is $400, then a move to 16 or higher. Basis is seasonal and a Ross Hook.
On October 05 we told subscribers of our daily newsletter, Traders Notebook, "Consider entering a NOB spread 2000*TUZ6 – 1000*USZ6 at a spread value of $92,160. Please ask your broker about the margin. Suggested risk is $1,000. Initial projected objective is $1,000, then a move to $94k or even higher. Basis is seasonal (10/4 – 10/20) and a 1-2-3 low. Comment: So far the spread is in a very nice down trend and it seems a bit risky to enter it now on the 1-2-3 low. I personally would not wait till I get stopped out with a $1,000 loss. I would accept not more than maybe $500. If the trade is not working out right now, I would wait to see if I get another entry. Or, in case you don’t like the idea, just wait for the next Ross Hook."
Here's how we suggested managing this trade:
10/05 Spread is trading around the entry level. I personally would wait till I get a clear break out of the 1-2-3 low.
10/06 Suggest entering MOC on Tuesday (if not already in).Open equity on remaining contracts: $460 per contract.
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Student's Question: "Hi Andy! I just wiped out for the second time. Am I some kind of trading freak?"
Andy: Most successful traders failed at some point in their careers and wiped out their account. Many traders lose because they do not understand the nature of the decision-making process, which should be based on rational price action analysis versus emotional, irrational reactions to price action. A reason should be required for each market action taken. When fear exits a trade, it is more difficult to take the next technical signal. Traders will eventually become confused and feel guilty from indecision. Do successful traders buy an education with the mistakes they make?
What separates the winners from the losers is that they learne from mistakes, refine the decision-making process, keep on trying and never give up. If traders cannot accept the losses that go with the trading, they do not deserve the profits. Failure is the greatest teacher only when a student is prepared to learn. If the student has forgotten previous lessons, or the dog ate his homework, he is not ready. A positive attitude has positive expectations of future events and normally precedes the success it creates.
Another reason for failure is that traders fail to understand the real nature of the markets. They do not comprend where prices will move, why they will move, and what it is that makes them move. That’s why we teach these things at our seminars.
© 2006 by Trading Educators, Inc
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Disclaimer:
The Commodity Futures Trading Commission has asked us to advise you that trading spreads is complex and carries a high degree of risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders!