Seasonal Spreads

The idea of "seasonal trading" in individual futures markets and futures "spreads" is based on the repetitive price patterns that many markets can exhibit throughout the year. Evaluating different known repetitive trading opportunities every month may be one of the oldest uses of a "systematic trading strategy".

These "seasonal" patterns of supply and demand and the associated price patterns can be an important criteria for evaluating trading opportunities, and all traders should be "aware" of any strong seasonal tendencies normally associated with a market they are considering trading. In addition, seasonal trading and futures spreads can provide unique profit opportunities for traders willing to study this under-appreciated resource in the trading world.

Seasonal Spreads are simply a simultaneous buy and sell in different futures contracts. (See Examples of Futures Spreads) The trader is only concerned with the relationship between the prices of the different contracts involved and not with the direction each individual contract may move.

If a trader thinks the difference between the contracts will increase, it would be possible to win on the trade as long as the contract he buys goes up more than the one he sold, or even if the one he sold goes down more than the one he bought. If a trader thinks the difference between the contracts will decrease, it would be possible to win on the trade as long as the contract he buys goes up less than the one he sold, or even if the one he sold goes down less than the one he bought.

These trades can involve either the same commodity with different delivery months (i.e. buy July Wheat and sell December Wheat), or different commodities (i.e. buy December Wheat and sell December Corn). We look for Seasonal Spreads that have a strong historical pattern of consistency. Although past performance does not insure future results, we sure do like to have a strong historical tendency in our favor during the time of the trade.

In order to discern spread seasonals, we use a daily composite spread charts, constructed in a fashion similar to daily seasonal futures charts. In spread trading, of course, we are dealing with two futures contracts rather than one. The price plot on the spread composite chart indicates a particular contract's gaining or losing in price relationship to another contract. Hence, the difference between two prices in what a spread plots.

1. The technique by which seasonality is determined for commodity spreads and the method by which it is employed in a trading method are outlined in considerable detail in "How to Profit from Seasonal Spreads" by Jake Bernstein. Average or novice traders do not ordinarily attempt commodity spread trading; however, it is reliable and potentially profitable techniques when used with seasonal tendencies and patterns.

2. Advance Trading Systems utilize MRCI and Jake Bernstein computer programs, which analyze trends that have recurred in the same direction during a similar period of time in at least 80% of the last 15 years. The underlying theory assumes that causal fundamental factors specific to that time period must have existed and may be influential again, thus making each historically 80%-or-more reliable strategy valid as a potential trading idea. (Remember, however, that past performance is not necessarily indicative of future results). These methods are not recommendations but rather presentations of quantified historical fact. These seasonal strategies identify computer-optimized dates on which prices have consistently been higher (lower) than on a previous date. These strategies are used to quantify price history - both cash and futures - in all commodity spreads, that offer a variety of relevant trading perspectives. Seasonal average and Daily continuation charts for contract-specific spreads are plotted by the computer programs to portray the difference between the two contracts. Not only patterns of price behavior but also typical price relationships are apparent in these. They are intended to illustrate historical relative value, turning points, and long-term trends for particular hedging, basis, and trading strategies.

3. From these seasonal patterns, one can derive a seasonal approach to both futures and futures spreads markets that is designed to anticipate, enter, and capture recurrent price trends as they emerge and exit before they are "realized". Computerized technical analysis is used to identify certain "windows of opportunity" that may exist within these patterns. The system uses more than 100 technical indicators to perform Back Tests for each indicator to determine the system efficiency for each commodity spread market. This process will simulate trading on each trading indicator and select the best ones to form a consensus and yields the highest probability trades. As long as the general system efficiency after the Back Test remains more or less consistent, the program will continue to generate excellent signals on the Vote Output from these systems. [See Disclaimer].

4. Each and every day the program downloads historical and current spread data and updates the system spread portfolio with current prices. Based on the Active Trading Model, a systems test is performed on all commodities spread markets in the program portfolio. The trading systems “vote” or confirm one another to generate trading signals, accompanied by the signal relative confidence index reading. After each market is evaluated for strength, weakness and fundamental setup conditions, the program produces buy/sell Seasonal Spread Recommendations.

5. Upon entering the trade, we usually set an initial profit objective and we always have a predetermined risk level. To help establish these levels, again we find it helpful to research the history of each Seasonal Spread over the past 15 years.

A spread is the simultaneous purchase of a futures or options position and the sale of a position in a related futures or options contract. Spreads are used when the difference in prices between the long and short contracts is considered to be "out-of-line". Spread positions often are viewed as less risk than outright futures positions, but this is a general statement that is subject to a number of important qualifications.

More generally, spreads, if used properly, can be a key tool to managing the risk in a position while maintaining a profit potential:

1. A wide variety of trading situations to choose from. Futures spreads can be used into four broad categories. Although traders may combine these different types of spreads, the risks of combined positions can be analyzed by decomposing them into the four basic types: Intramarket Intermarket, Intercommodity and Commodity-products spreads.

2. Less sensitive to market direction predictions of the individual contracts. Spreading strategies assume that both the long and short contracts used in the spread are affected by the same economic circumstances. As a result, prices of the long and short are expected to move generally in sync. If, for some reason, the prices of the two futures do not move together, then an opportunity to profit may arise. If a market participant believes that current price relationships between related futures contracts are out-of-line, then he or she would buy the relatively underpriced contract and sell the relatively overpriced. If the two contracts move back to the expected price relationship, then the position makes a profit.

3. May be easier to predict market relationship patterns than price direction. You might ask why people trade spreads when they can just as easily buy one futures contract and sell another one via separate transactions. An important reason to place a spread order, rather than orders for the individual components of the spread, involves order-placing strategy. When you trade the spread, you lock in the price differential between the “legs” of the spread, often by specifying the exact differential. If you try to trade the spread by placing two different market orders, for instance, many things could happen between the time you place your order and the time both legs are filled. Thus, a single spread order can be more predictable and less risky than multiple individual orders.

4. Although not always you can get a better price trading the spread than you can trading the individual contracts. This is because when you trade the individual contracts, you buy on the ask and sell on the bid. Sometimes, however, the spread is quoted using only the bids or only the asks, and consequently you get a better price.

5. Lower margin requirements than straight futures positions. In addition to lower spread margins, commissions normally are less than the sum of the on the two separate legs. This may be another reason to trade a spread.

* Some Precautionary Notes About Spread Trading

Spreads have enormous appeal to traders. But part of this appeal may be illusory. Spreads are not always less risky than outright long or short positions.

In one respect, spreads do reduce risk. A trader who is simply long or short is exposed to greater potential losses from market fluctuations than the spreader whose two positions tend to offset each other. The trader taking outright long or short positions may occasionally face “limit moves” against him for one or more successive days. Such ”locked-in" losses are not as likely in a spread position in the same commodity (unless one leg of the spread is not subject to the price limits). In other respects, however, the risk exposure between a spread and an outright position is variable and not always in favor of the spread.

DISCLAIMER: THERE IS RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

DISCLAIMER: 'HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN."

DISCLAIMER: The use of stop loss order does not guarantee that your losses will be limited to the intended amount. Certain market conditions could make it impossible to execute such orders.

More generally, spreads, if used properly, can be a key tool to managing the risk in a position while maintaining a profit potential:

* Some Precautionary Notes About Spread Trading