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Spread
Scan Issue: July 11, 2007 - Volume 152
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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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Today we consider a calendar spread: long December 08 Wheat and short December 07 Wheat (WZ8 – WZ7). The spread has been in a strong down trend reaching -65 in June. This level seems to be very low, and there is a good chance the spread will move higher. The June low at -65 could be a good place for the initial stop.
Traders may want to enter the spread at a value of -45. Margin for the spread is $945. Suggested risk is $1,000. Initial projected objective is $1,000, then higher.
On July 01 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider entering an inter-market energies spread 1000*CLQ7 – 420*HOQ7 at -15,500 or better. Initial margin is $3,426 (reduced margin). Suggested risk is $1,000. Initial projected objective is $1,000 then a move higher. Basis is seasonal (app. 7/1 – 7/15) and a 1-2-3 low."
Here's how we suggested managing this trade:
07/02 It was possible to enter the trade at around -15,500. Suggested stop at -16.400.
For more information about our daily newsletter, visit our Spread Website to find out more about Traders Notebook
Questions or Comments? Please email us: support@spread-trading.com
Student's Question: "Andy, do you always enter and exit a spread using a Market On Close (MOC) order?"
Andy: Most of the time I use a simple MOC order to enter or exit my spreads. The MOC order has the advantage that you have to get filled in the last few minutes of the trading day, and therefore you can check if your fill is in the correct range. Also, volume is best on the open and the close. For my fixed targets I use a spread limit order. If you trade electronic markets you might not be able to enter via MOC order. Just use a simple market order instead, and execute it in the last few minutes before the pit close.
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It is not difficult to learn how to successfully trade spreads. There are some people who claim that spread trading is difficult to learn, and that it is even dangerous to trade with spreads. Their claims are not at all true. For selfish reasons of their own, some traders don't want to reveal to others how simple and promising it is to trade spreads, and others are just repeating what they have heard without verifying the information for themselves.
From my 50 years of successful trading experience, I can say with assurance that spreads are neither difficult to understand nor dangerous to trade. It is quite the contrary: trading spreads is very suitable for the beginning trader with a small account, as well as being a technique that should be in every trader's toolkit.
People say to us, "I'm interested in learning about trading spreads but
I don't know where to start." I'll answer that right now — follow this link to our spread website...
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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!