Tuesday, February 17, 2009

Spread Trading

In trading you need to move on, when it becomes crowded. There is still money to be made, but the moves become random, the edge you have erodes over time and you find that more and more setup's stop working, have not the follow-through you are used to or more and more trades hit your stop-level. Sure you can fine-tune and you should do that for a while, as you might just be slightly out of sync with the market. But when you start doing that it's also time to broaden your horizon. You need to look for new, greener pastures.

I'm doing that at the moment and you might find it interesting to take a look yourself, so I will add these thoughts here.
In trading you will seldom find something really new, what has changed is the velocity, what took days and weeks can now be made in hours and minutes. That change is true not only for equities and equity index futures, that is also true in commodities or bond trading.

I recently started looking at spreads, actually calendar spread trading. This chart shows the Spread between April Light Sweet crude and march Light Sweet Crude (CL J9 - CL H9)

Calendar spread trading is a very old trading technique, it works a lot better better in physicaly delivered contracts, than in money settled contracts, but it trends in both. What you will see, is that this spread has not a lot of momentum spikes and if there is one it is usually safe to fade it, as Oil is still Oil, the only difference is the delivery time. So spikes and freak moves seen in the individual contract to get the weak traders out, will not show on the spread chart, as the spikes happen in both contracts. Only the underlying trend will really move the spread, meaning get it right and stay with the trade. I have just ordered Keith Schap's book "The complete Guide to Spread Trading" which Newton Linchen recommended and whose website you might take a look to.

You can make war about the same meager bone or you can step aside and look for new bones outside of mainstream. These usually are bigger and safer to get than the ones thrown to the Wolfe-pack.