32 lines
2.5 KiB
Plaintext
32 lines
2.5 KiB
Plaintext
449
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tHe COnCepts And MeCHAniCs OF spreAd trAding
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Step 2: Isolation of Similar Periods
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As a rule, spreads will tend to act similarly in similar situations. thus, the next step would be a refine-
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ment of step 1 by means of isolating roughly similar periods. For example, in a high-priced year, we
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might be interested in considering the spread action only in other past bull seasons, or we can cut the
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line still sharper and consider only bull seasons that were demand oriented or only those that were
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supply oriented. An examination of the spread’s behavior during different fundamental conditions in
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past years will usually reveal the relative comparative importance of similar and dissimilar seasons.
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Step 3: analysis of Spread Seasonality
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this step is a further refinement of step 1. sometimes a spread will tend to display a distinct seasonal
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pattern. For example, a given spread may tend to widen or narrow during a specific period. Knowledge
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of such a seasonality can be critically important in deciding whether or not to initiate a given spread.
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For example, if in nine of the past 10 seasons the near month of a given spread lost ground to the distant
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month during the March–June period, one should think twice about initiating a bull spread in March.
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Step 4: analysis and Implications of relevant Fundamentals
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this step would require the formulation of a concept of market direction (in commodities where
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applicable), or equivalent appropriate analysis in those commodities where it is not. this approach is
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fully detailed in the sections entitled “the general rule” and “the general rule—Applicability and
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nonapplicability.”
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Step 5: Chart analysis
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A key step before initiating a spread trade should be the examination of a current chart of the spread
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(or the use of some other technical input). As in outright positions, charts are an invaluable informa-
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tional tool and a critical aid to timing.
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■ Pitfalls and Points of Caution
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■ do not automatically assume a spread is necessarily a low-risk trade. in some instances, a spread
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may even involve greater risk than an outright position. specifically, in the case of intercommodity
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spreads, intercrop spreads, and spreads involving nonstorable commodities, the two legs of the
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spread can sometimes move in opposite directions.
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■ Be careful not to overtrade a spread because of its lower risks or margin. A 5- to 10-contract
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spread position gone astray can often prove more costly than a bad one-contract outright trade.
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Overtrading is a very common error in spread trading. |