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Spread
Scan Issue: December 13, 2006 - Volume 122
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Today we consider an intra-market grains spread: long December 07 Corn and short July 07 Corn (CZ7 – CN7). The spread was in an extreme down trend in October and November. After moving sideways during the end of November, it seems the spread is changing its direction. Seasonality is not an important factor in considering this trade. The question is, will the spread move back up to where it came from?
Traders may want to enter the spread at –26 ½. Margin for the spread is $405 (reduced margin). Suggested risk is $400. Initial projected objective is $400, then a move to break even.
On October 23 we told subscribers of our daily newsletter, Traders Notebook, "Consider entering an intra-market wheat spread WZ7 – WH7 MOC on Monday. Margin for the spread is $1,350 (reduced margin). Suggested risk is $1,000. Initial projected objective is $1,000, then a move to break even or higher. Basis is seasonal (app. 10/25 – 02/30) and a RH. Comment: Wheat is moving up like crazy. I personally would try to get into the trade at least with 2 lots. I would get rid of the first lot pretty quick, and would leave the second for a long term trade."
Here's how we suggested managing this trade:
10/23 In?
10/30 Spread is having a hard time. It just doesn’t want to move up. I personally would exit if the spread doesn’t move up to my first target by Friday.
10/31 Spread is close to the first suggested target. Suggest moving the stop to –54^4.
11/01 Suggest taking some money from the table if not already done.
11/03 Spread hit first suggested target.
11/07 Suggest moving the stop higher to –49.
11/09 Suggest moving the stop higher to –40 ½
11/13 Suggest moving the stop higher to –35 ½.
11/21 Suggest moving the stop to –28.
11/22 Suggest moving the stop to –22.
11/24 Suggest moving the stop to –19 ¾ (if you think the stop is too close, leave it farther away).
11/27 Spread hit suggested trailing stop. Suggest exiting MOC tomorrow.
11/28 Maybe you are still in the trade after such a nice up move. Suggest keeping the stop at the same level.
12/06 Suggest moving the stop to –15 ¾.
12/08 I personally would move my stop closer (-9), because it will go flat by end of next week. If you want to stay in the trade you might want to use a wider stop.Open equity on remaining contracts: $2,650 per contract. Please keep in mind that we already realized profits of about $1,000.
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Student's Question: "Andy, we are almost done with 2006. Any idea how I can get ready for 2007?"
Andy: If you have a trading journal, there is plenty for you to do. If not, you should get one for next year. Here is what you can do while going through your trading journal:
- Look at the big winners and the big losers. What caused the good trades to become big winning trades? And what happened with the big losers? Is there any way to avoid them?
- What is your winning percentage (comparing the winning trades to the number of all trades)?
- What is your win/loss ratio (divide your average winner by your average loser)?
- How was your trade management? How does the winning % and the win/loss ratio change when you manage your trade differently? For example: did you exit 1/3 of your position at the first target, 1/3 at the second target, and 1/3 using a trailing stop? What would have happened had you used a different strategy for your exits? What happens to the winning % and the win/loss ratio when you exit ½ at the first target, and ½ using a trailing stop? Try to play with the numbers to find your personal exit strategy.
- What about your risk management? Did you always risk the same % of your trading account on each trade? Or did you use a risk of 10% on some trades and only 5% on others?
- Did you follow your trading plan with enough discipline? Did you get out fast enough on your losing trades, and did you stick to the winning trades?
As you can see, we can learn a lot for the future from the past. The trading journal is essential in helping you to improve your trading. If you don’t keep one – start one!
Joe's primary objective in this manual is to teach you how to trade profitably. In order to do that, he has to teach you to run your trading as a business, with an economic motivation and with sound management.
Trading Is a Business will show you how to become a successful trader, by showing you how to properly manage your trades and yourself.
Trading will become much easier, more pleasant, and more relaxed. Why? Because you will understand the markets and what is really going on.Follow this link to read more about this great manual from
Trader, Author and Educator: Joe Ross
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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!