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+INTERCOMMODITY SPREADS: DETERMINING CONTRACT RATIOS
+ Thus, while the naive placement of an equal contract spread actually results in a $2,218 loss 
+despite the validity of the trade concept, the more appropriate equal-dollar-value approach results in 
+a $18,508 gain. This example emphasizes the critical importance of determining appropriate contract 
+ratios in intercommodity and intermarket spreads. 
+ An essential point to note is that if intercommodity and intermarket spreads are traded using an 
+equal-dollar-value approach—as they should be—the price diff  erence between the markets is no 
+longer the relevant subject of analysis. Rather, such an approach is most closely related to the price 
+ratio  between the two markets. This fact means that chart analysis and the defi  nition of historical 
+ranges should be based on the price ratio, not the price diff  erence. Figures   31.1   ,   31.2   , and   31.3    illus-
+trate this point. Figure   31.1   depicts the September 2013 wheat/September 2013 corn spread in the 
+standard form as a price diff  erence. Figure   31.2   illustrates the price ratio of September 2013 wheat 
+to September 2013 corn during the same period. Finally, Figure   31.3   plots the equity fl  uctuations of 
+the approximate equal-dollar-value spread: 3 wheat versus 4 corn. Note how much more closely the 
+equal dollar position is paralleled by the ratio than by the price diff  erence. 
+3      
+ 3  The equal-dollar-value spread would be precisely related to the price ratio only if the contract ratios in the 
+spread were continuously adjusted to refl  ect changes in the price ratio. (An analogous complication does not 
+exist in equal-unit spreads, since the contract weightings are determined independent of price levels.) However, 
+unless price levels change drastically during the holding period of the spread, the absence of theoretical readjust-
+ments in contract ratios will make little practical diff  erence. In other words, equity fl  uctuations in the equal-
+dollar-value spread will normally closely track the movements of the price ratio.
+    FIGURE  /uni00A031.1    September 2013 Wheat Minus September 2013 Corn
+Chart created using TradeStation. ©TradeStation T echnologies, Inc. All rights reserved.