Add training workflow, datasets, and runbook
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tHe COnCepts And MeCHAniCs OF spreAd trAding
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3. Spreads often offer some protection against sudden extreme losses due to dra-
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matic events that may spark a string of limit-up or limit-down moves counter to
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one’s position (e.g., freeze, large export deal).
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such situations are not all that infrequent,
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and traders can sometimes lose multiples of the maximum loss they intended to allow (i.e., as
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reflected by a protective stop) before they can even liquidate their positions.
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in contrast, during
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a time of successive limit moves, the value of a spread might not even change as both months
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may move the limit. Of course, eventually the spread will also react, but when it does, the
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market may well be past its frenzied panic stage, and the move may be gradual and moderate
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compared with the drastic price change of the outright position.
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4. a knowledge and understanding of spreads can also be a valuable aid in trading
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outright positions. For example, a failure of the near months to gain sufficiently during a
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rally (in those commodities in which a gain can theoretically be expected) may signal the trader
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to be wary of an upward move as a possible technical surge vulnerable to retracement.
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in other
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words, the spread action may suggest that no real tightness exists. this scenario is merely one
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example of how close observation of spreads can offer valuable insights into outright market
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direction.
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naturally, at times, the inferences drawn from spread movements may be mislead-
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ing, but overall they are likely to be a valuable aid to the trader. A second way an understanding
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of spreads can aid an outright-position trader is by helping identify the best contract month in
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which to initiate a position.
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the trader with knowledge of spreads should have a distinct advan-
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tage in picking the month that offers the best potential versus risk. Over the long run, this factor
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alone could significantly improve trading performance.
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5. trading opportunities may sometimes exist for spreads at a time when none is
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perceived for the outright commodity itself.
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■ Types of Spreads
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there are three basic types of spreads:
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1. the intramarket (or interdelivery) spread is the most common type of spread and con-
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sists of buying one month and selling another month in the same commodity. An example of an
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intramarket spread would be long
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december corn/short March corn. the intramarket spread
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is by far the most widely used type of spread and will be the focus of this chapter’s discussion.
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the intercrop spread is a special case of the intramarket spread involving two different
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crop years (e.g., long an old crop month and short a new crop month). the intercrop spread
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requires special consideration and extra caution. intercrop spreads can often be highly volatile,
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and price moves in opposite directions by new and old crop months are not particularly uncom-
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mon.
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the intercrop spread may often be subject to price ranges and patterns that distinctly
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separate it from the intracrop spread (i.e., standard intramarket spread).
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2. the intercommodity spread consists of a long position in one commodity and a short
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position in a related commodity. in this type of spread the trader feels the price of a given
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