This is a short follow up to my previous article on Swine Flu (H1N1). Check it out here if you have not read it. http://www.protraderdigest.com/articles/20090514.
That article spoke about how markets, like people, can panic and do silly things. We saw how Lean Hog futures sold-off on the break of the initial Flu reports and how once things settled, the market settled too.
The article also showed how the spread between distant Hog futures (December expiry) and nearby Hog futures (August expiry) traded relative to each other. In time of panic you would generally see the nearer month contract react more and therefore creating a ‘spread trading’ opportunity.
As it turns out, it’s been a terrible time to trade individual Hog futures, but a great time to trade the spreads. I am writing this short article to illustrate the advantages of trading spreads over individual futures.
OK, so let’s look at the August contract.
Point 1 shows the sell-off when the news hit. Point 2 shows the two weeks where the market recovered and let us think it was all over. Point 3 and beyond is where the market fell to pieces. That’s a tricky market to trade by anyone’s standards (without hindsight that is).
Trading in the December contract has been even more choppy.
Again, Point 1 shows the initial news. Point 2 shows a recovery to back above where the market was before the news. Point 3 was a sell off. Since then there has been just a choppy state of confusion. Perhaps some of this could be seen as logical after the fact, but at the time, it would be too choppy to trade.
So then, what do you think Hogs spreads look like? By ‘spreads’, I mean the price difference between the near expiry and distant expiries. In this case, let’s look at the December versus the August contract.
From the above charts, you might guess the spread prices have also been choppy and confusing. Truth is the opposite has happened. Look at the chart below.
Point 1 shows where the news broke. The subsequent move has been a pretty much uninterrupted bull market.
As I pointed out in the previous article, this spread started to turn from lows BEFORE the Swine Flu news broke. In fact, some technical traders out there would be long the spread purely for that reason alone.
The really exciting thing about this chart is it shows how near perfect this bull trend has been. The last few days have seen a runaway market but apart from that, it’s been a rather steady bull market. Bottom line is it has been heading in one direction, not chopping about. Herein lays the one of the great advantages of trading spreads.
Spreads often have less ‘noise’ or confusing volatility. As a result spreads are often more predictable.
When newcomers enter the market, they often look for the simplest instrument to trade and often get chopped up in the process.
Wouldn’t it make more sense to start with a trading method that gives you a better chance of winning? In my view that is what spreads offer.
To get to any new place you need a roadmap. Earlier in the year I wrote an ebook called “The Guide to Futures and Spread Trading”. Its purpose was to explain the concept of spread trading to newcomers.
I’ve just started laying out plans to build this into a either a printed book or course. I’ll be charging for that. For now however, it’s still free. To get it, just sign up for my free weekly email newsletter at the top of the page.
Also, if you are ready to take the next step in your trading and sign up for the ProTrader Digest, I can offer 10% off the monthly subscription when you pay quarterly.
Just follow the link to www.ProTraderDigest.com and click Join!
Regards,
GB
