21 lines
1.5 KiB
Plaintext
21 lines
1.5 KiB
Plaintext
451
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tHe COnCepts And MeCHAniCs OF spreAd trAding
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■ Because it is especially easy to procrastinate in liquidating a losing spread position, the spread
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trader needs to be particularly vigilant in adhering to risk management principals. it is advisable
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that the spread trader determine a mental stop point (usually on the basis of closing values) prior
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to entering a spread and rigidly stick to liquidating the spread position if this mental stop point is
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reached.
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■ Avoid excessively low-risk spreads because transaction costs (slippage as well as commission) will
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represent a significant percentage of the profit potential, reducing the odds of a net winning out-
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come.
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in short, the odds are stacked against the very-low-risk spread trader.
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■ As a corollary to the prior item, a trader should choose the most widely spaced intramarket
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spread consistent with the desired risk level.
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generally speaking, the wider the time duration in
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an intramarket spread, the greater the volatility of the spread. this observation is as true for mar-
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kets conforming to the general rule as for markets unrelated or inversely related to the general
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rule.
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traders implementing a greater-than-one-unit intramarket spread position should be sure to
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choose the widest liquid spread consistent with the trading strategy. For example, it usually would
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make little sense to implement a two-unit March/May corn spread, since a one-unit March/July
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corn spread would offer a very similar potential/risk trade at half the transaction cost. |