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tHe COnCepts And MeCHAniCs OF spreAd trAding 
Step 2: Isolation of Similar Periods
As a rule, spreads will tend to act similarly in similar situations. thus, the next step would be a refine-
ment of step 1 by means of isolating roughly similar periods. For example, in a high-priced year, we 
might be interested in considering the spread action only in other past bull seasons, or we can cut the 
line still sharper and consider only bull seasons that were demand oriented or only those that were 
supply oriented. An examination of the spread’s behavior during different fundamental conditions in 
past years will usually reveal the relative comparative importance of similar and dissimilar seasons.
Step 3: analysis of Spread Seasonality
this step is a further refinement of step 1. sometimes a spread will tend to display a distinct seasonal 
pattern. For example, a given spread may tend to widen or narrow during a specific period. Knowledge 
of such a seasonality can be critically important in deciding whether or not to initiate a given spread. 
For example, if in nine of the past 10 seasons the near month of a given spread lost ground to the distant 
month during the March–June period, one should think twice about initiating a bull spread in March.
Step 4: analysis and Implications of relevant Fundamentals
this step would require the formulation of a concept of market direction (in commodities where 
applicable), or equivalent appropriate analysis in those commodities where it is not. this approach is 
fully detailed in the sections entitled “the general rule” and “the general rule—Applicability and 
nonapplicability.”
Step 5: Chart analysis
A key step before initiating a spread trade should be the examination of a current chart of the spread 
(or the use of some other technical input). As in outright positions, charts are an invaluable informa-
tional tool and a critical aid to timing.
 ■ Pitfalls and Points of Caution
 ■ do not automatically assume a spread is necessarily a low-risk trade. in some instances, a spread 
may even involve greater risk than an outright position. specifically, in the case of intercommodity 
spreads, intercrop spreads, and spreads involving nonstorable commodities, the two legs of the 
spread can sometimes move in opposite directions.
 ■ Be careful not to overtrade a spread because of its lower risks or margin. A 5- to 10-contract 
spread position gone astray can often prove more costly than a bad one-contract outright trade. 
Overtrading is a very common error in spread trading.