Wednesday, September 5, 2007

A More Conservative Approach To Futures Trading - Seasonal Spread Trading

Spread trading is a concept not all that familiar to the average commodity investor. The typical commodity trader analyzes a particular market, either from a technical or a fundamental standpoint, sometimes combining the two; makes a determination as to whether the market exhibits either a bullish or bearish bias, and then wagers by going long a futures contract or purchasing a call option, or by going short a futures contract or buying a put option. There are a number of variations on the theme, but the idea is basically the same.

The following demonstrates the inherent disadvantages in the above two basic scenarios of an outright futures position or the purchase of an option;

1. Size of account. The average investor has a limited bankroll, and can only withstand a certain amount of drawdown associated with any particular trade. The limited size of trading account necessitates the placement of a protective stop order above or below the position. The premature assumption of a position and the inherent volatility associated with commodity markets leaves the position vulnerable to a one or two day move that triggers the stop order, sidelining the trader as the position oftentimes turns back around. As the market moves in the traders favor, the advisability of using trailing stops, adjusting the protective stop in the direction of the trade makes sense in theory, but oftentimes the market will open well above or below the stop order, blowing out the stop and oftentimes taking away a substantial amount, if not all of the profit that was being locked in.

2. Time. In the case of an options purchase, you are basically purchasing time. As the purchaser of an option, the time clock and the calendar become your worst enemy. The value of your option depreciates as you wait for the market to move in your direction. Typically the purchaser of an option witnesses the market go up and down, as the value of his option changes, all along the remaining time value decaying on an accelerated curve as the option expiration day grows nearer.

Spread trading on the other hand, is a way of effectively combating the above two problems. Time no longer is an enemy and volatility, to a certain extent, is effectively neutralized. Margins are substantially reduced due to the relative conservative nature of the hedged trade, which the commodity exchanges themselves recognize. Spread trading has no directional bias. The market can go up or down, the trade is based only the relationship between the long and the short position, i.e.- as long as the long side of your spread outperforms the short side you will be profitable. Spread trades can be in the same commodity with different delivery months (i.e. buy July Lean Hogs and sell December Lean Hogs), or different commodities (i.e. buy March Swiss Franc and sell March Australian Dollar). Generally speaking, both sides of the trade will have the same overall directional bias, as in being both long and short in the Grains (long Corn/short Wheat) , or in the Meats (long Live Cattle/short Feeder Cattle), or in the Metals (long Gold/short Silver). This allows for the built in "hedge".

Seasonal spread trading is another opportunity in taking advantage of this manner of trading. As there also many seasonal tendencies associated with various commodity markets, there are also seasonal tendencies associated with seasonal spread trades. Any spread trade that has been successful say, 80% or better over the past 15 years is certainly a reasonable candidate for exhibiting a seasonal tendency and worth looking into. There are a number of advisory services that offer seasonal spread trade recommendations based on historical analysis, but to altogether ignore the technical set up may result in entering the trade too early, resulting in unnecessarily larger drawdowns, or in entering the trade too late, missing the trade altogether.

Seasonality is a seasonal cycle that forms a similar, reliable pattern every year for many years.

Reliable seasonal tendencies are all around us;

Everyone is familiar with weather seasonality. In the winter months the temperature is colder than in the summer months.

Farmers will plant crops and harvest crops at about the same time every year.

In the summer months, Crude Oil is usually higher than in winter (because people drive cars more in summer).

In the winter months heating oil is usually higher than in the summer (because more people are trying to stay warm in winter).

Any spread trade that has been successful 80% of the time or better over the past 15 years is certainly a possible candidate for exhibiting a seasonal tendency and worth analyzing further. Once the historical average optimal entry and exit dates are determined, it is time to examine the trade on the technical setup. Is the spread overbought or oversold, what are the support and resistance points? Basically does the trade look technically, as well as fundamentally sound? There are a number of advisory services that offer seasonal spread trade recommendations based on historical analysis, but ignoring the technical set up may result in entering the trade too early, resulting in unnecessarily large drawdowns, or in entering too late, missing the trade altogether. Good trading!

Robert Rutger is is a Senior Broker and principle with Transworld Futures ( He has been in the industry for going on 8 years, as a licensed Series 3 Broker, and takes the time with his clients to assist them in being successful in their commodity investment plans.


Trade Stocks

Day Trading

Lets assume you are a new entrant to the day trading. Till now you havent traded stocks or futures except your baseball cards as a kid and that was years ago. As an employee you have slogged really hard and now you are successful in your respective field. However, recently you decided to venture out in trade securities with some of your accumulated savings. The first word of caution to you will be, stay on your toes and play intelligently.

The world of day trading sounds easy and simple. Thanks to the ads on TV. In reality, it isnt an easy task and you have to play safe with open eyes. Being a novice to this field, it will be advisable to go for an online day trading broker. Day trading world is fast paced where stocks, futures, and currencies are speedily bought and sold on the same day. You have to match up this swift speed and also try to have updated information. Many people are still in qualm whether day trading is a positive aspect of trading in the stock market.

Traders have successfully ventured in day trading, will call it a science, which is difficult to master for the average person. Many investors are fascinated to the idea of brisk returns but it involves a high amount of risk that traders may or may not be ready for. For a successful stint in day trading you ought to have knowledge of the fundamentals involved in online day trading. These fundamentals will keep you away from losing money in any part of the stock market. If we talk in a layman terms, day trading is the practice of buying and selling financial instruments, such as stocks, stock options, currencies, equity index futures, interest rate futures, and commodity futures within the same trading day.

In contemporary day trading, majority day traders are bank or investment firms employees working as consultants in equity investment and fund management. Off lately, day trading has become very popular among casual traders too. This is due to rapid advances in technology, changes in legislation, and the popularity of the Internet. Online is the best place for day trading these days, as you dont have to go anywhere and everything can be easily done with a click of your mouse. If you hire the best company in online stock trading you are at a beneficial end. They are the ones who will do all strategy making on your behalf. Majority day traders employ various trends, such as range trading, scalping, and playing news.

Range trading: This range trading is the buying of stocks that are falling. These falling stocks are brought at the lowest price and later they are sold at a higher price.

Scalping: Scalping or also known as spread trading and quick trading, mainly consists of settling a trade within a matter of seconds or minutes.

Playing news: The last one to follow is playing news and it is one of the most popular strategies for day traders. It usually consists of purchasing stocks that offers the investor good returns and selling the ones that wont.

The proven way of emerging winner in day trading is to have extremely up-to-date information. Information can be gathered from various sources such as from an online broker, day trading companies, day trading websites, and many more mention. Day trading involves requisite skills and strategies that can be gained through either by online day trading broker or by contacting

SogoInvest is a discount online brokerage stock day trading firm. This product-oriented day trading firm is more towards investor, along with a beginner or an advanced professional. If you are seeking to build a long term and varied portfolio, without using expensive and complicated methods SogoInvest should be your certain destination.

online stock market trading can be an enriching experience when you know how to trade stocks.