Economic subjects | Investments, Stock exchange » Joe Ross - Trading spreads and seasonals

TRADING AND Joe Ross Table of Contents Introduction . 9 Foreword . 11 Preface . 13 Chapter 1 What is a "Spread?" . • • • • • • • • • 15 Chapter 2 Why Use Spreads? . • • • • • • • • • • • 21 Chapter 3 How to Trade Spreads to Reduce Risk .•••••• 29 Chapter 4 Seasonal Spread Trade Selection . • • • • • • • 45 Chapter 5 Filtering Process: Checking the Fundamentals • . 53 Chapter 6 Filtering Process: Time Window . • 61 Chapter 7 Filtering Process: Entry and Exit Signals . • 67 Chapter 8 Seasonal Spread Examples . 75 Chapter 9 Non-Seasonal Spreads . 89 Chapter 10 Fractional Spreads .••••• 97 Chapter 11 Conversions . • • • • • •

• • • 103 Chapter 12 Using Spreads to Reduce Volatility . • • • • 111 Chapter 13 Trading Spreads Using Technical Indicators . • • • • 119 Chapter 14 Technical Filtering for Spreads .• 127 Chapter 15 Seasonal Spread Trading w/ Bollinger Bands and RSI . 147 Chapter 16 Introducing Seasonals . 165 Chapter 17 What is a "Seasonal?" .• 167 Chapter 18 Seasonal Futures Market Selection . • • 173 Chapter 19 Seasonal Futures Trade Selection .•••••• 177 Chapter 20 Outright Seasonal Futures: Checking the Fundamentals .•• 179 Chapter 21 Seasonal Futures: Time Window • • • • • • • • • • • • • • • • • • • • • • • • 187 Chapter 22 Seasonal Futures w/Chart Patterns and Bollinger Bands •••• 195 Chapter 23 Thinking and Trading Go Together ••.•••••••••••••••••• 219 Chapter 24 Beware of Stop Running .

• • • • • • • • • • • • • • • • 229 Chapter 25 Carrying Charge Spreads • • • • • . • • • • • • • • • • • • • • • 253 Chapter 26 Converting Daytrades to Spreads • • • • • • • • • • • • • • • • . • • • • • 259 Chapter 27 Wrap-Up . • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 263 6 7 Table of Contents Appendix A Chart Patterns for Outright Seasonal Futures 271 Appendix B Decision Tables . 307 Appendix C Resources . 321 Index Introduction Joe has done it again in his seventh published volume Trading Spreads and Seasonals a down-toearth, easy-to-read common sense book for the practical commodity futures trader Turn off your ·black box" and computer. and learn about the real-live facets of trading spreads and seasonals, as Joe

takes your hand and leads you through the sometimes tricky mechanics of intra and intermarket spreads and looks through the mostly predictable windows of opportunity offered in seasonal trading The answers to he whats and whys of spreading and seasonal trading :ire explained in plain, precise language which should be easily understood by old timer and new trader alike Joes famous "Ross Hook" is used in great detail in the spread and seasonal examples, and his filtering processes, entry and exit signals, and other technical studies are well founded The examples shown are excellent The use of "Bollinger Bands" and RSJ, as applied to spreads are unique. and are as important as those used in open positions. Joe pulls it all together: the fundamentals, the technicals, and the histories, to produce state-ol~ the-art solutions to the oldest of commodity trades, spreads and seasonals. In reviewing my past 46 years of trading seasonals and spreads, and as publisher of a

commodity futures spread newsletter for many years, I found Joes Trading Spreads and Seasonals a refreshing, informative, and rewarding work. Bob McGovern Laguna Niguel, CA 8 Foreword l have corresponded with Joe Ross for over a year, initially discussing several educational essays he kindly contributed to the momhly :vfoorc Research Center Report. More recently our conversations have centered on an objec,ive critique of this book as a work-in-progress Joe was always concerned with accuracy and validity. He wished not only to confirm the legitimacy of what he was presenting but also to be sure it was in no way misleading So. these first comments are directed more to the man than to the book My impression of Joe Ross is that he is an honest man-tough but honest. I mean honest in a larger sense He appears to be open and earnest in his efforts to share some of the vast trading wisdom he has accumulated in his nearly 40 years of trading futures. I mean tough because he views

"trading as a business" not to be taken lightly He does not appear to one who wishes merely to avoid "fabrication of fact" and. therefore, regulatory wrath Yes, he probably has an ego that hopes this book becomes a classic Yes, he is likely a confirmed capitalist who wants his book to sell-but, I dont believe he merely wants to take the money and run. I think Joe honestly wants to help narrow a gap in knowledge Some may decry this in the foreword to a book about speculating in a dog-eat-dog industry. However, J would submit that .the business breeds a certain degree of cynicism How many advertisements have you seen for the latest " must have new system, guaranteed to . ?" How many seminars will unlock for the first time ever "the ultimate secrets" to unlimited profits? How many times could vou have spent several thousand dollars for a "breakthrough that reveals market destiny?" How many books offer "my insider strategy" -to

which the author himself no longer adheres? In Trading Spreads and Seasonals there may be no "black boxes," no "foolproof" techniques, no sophisticated complexity, but there are straightforward trading tactics. It may not be a literary masterpiece; but, in providing basics that every trader, both novice and professional, should know, it reads as though the author practices what he preaches. After trading spreads and seasonals for so long, he still trades them. Why? Because they have always been excellent trading vehicles and they always will be Furthermore, they each offer their own specific advantages, and once understood, neither is especially difficult. 10 lf Trading spreads fell out of favor in the early 1980s when revised tax codes removed favorable treatment for long-term capital gains. Funds dont concentrate on spreads, and very little literature on the subject has appeared recently A generation of futures traders (time is compressed in this industry)

have never learned either the art or the science of trading relationships Trading Spreads and Seasonals can help fill that void Joe defines spreads, describes their various types, points out in which markets they are most viable, and discusses their advantages and disadvantages. This book is not a theoreticaL conceptual treatise, however It takes a hands-on, howto approach in not illustrating only those spreads which succumb to his theories He wants to educate readers for real-time trading-how to find spreads, filter them, analvze them and place orders He also shows how just a couple of well-known technical indicators can further filter and enhance entry and exit Old-time fundamental traders (pre-1970 s) used to rely on seasonal tendencies for consistencv in their trading approach After the huge inflationary bull markets of the I 970s, the marketplace was flooded with a new breed of traders who had no knowledge of, no time to learn, and cared little about a markets own tendencies, the

normal effect on prices caused by the annual rhythm in supply/demand. Computers, trading systems, and technical concepts ruled instead Even with their access to the most current market fundamental conditions, you may rest assured that commercial interests are aware of and often rely on seasonal tendencies Their own market activity is dictated by shifts in supply and demand. However, those shifts which are annual in nature (big new supplies at harvest, temporarily reduced monetary liquidity after Apnl 15) must be anticipated by commercial firms who intend to stay in business. Therefore, those who are aware of a markets own historical trading patterns may more consistently be able to trade with, rather than against, the most knowledgeable and deepest pockets in the industry. Joe is one of the few in recent years to consider how those historical tendencies can be analyzed for trading in current real-time. Historical tendencies are powerful tools but in practice most traders need to

maintain some flexibility and use some judgment. This book helps demystify seasonal price movement As you read through Trading Spreads and Seasonals and examine the ideas Joe discusses, you may broaden your knowledge and scope of understanding of the business of trading. As you begin to recognize that "trading is a business," you may become a more mature, patient trader As your trading takes on the added dimensions of maturity and patience, you may become more relaxed; and as you become more relaxed, you may view markets-and life--with greater clarity. Trade em, Jerry Toepke, Editor Moore Research Center, Inc. 12 Preface I suppose I should have written this manual a long time ago. I have known about seasonal trend and seasonal spread trading for many years. Amazingly, this knowledge is Just as valid in todays markets as it has ewr been, and can be qmte profitable for the trader who is willing to pursue it The concept of trading seasonal trends and seasonal spreads has been

almost entirely overlooked by the hordes of daytraders who today riffle the markets with their almost frantic noise. It is also oYerlooked by the fund traders By fund traders I mean those massive pools of managed money residing in hedge funds, commodity pools, pension funds, bond funds, securities funds. etc In fact, with the exception of the large commercial interests, the whole concept of seasonal trend and seasonal spreading has been overlooked by most traders. Seasonal concepts extend far beyond seasonality itself. They probe the very core of what trading is all about. The fact that there have been only two widely read books written about seasonal trend and seasonal spread trading has not accomplished much in the way of dispensing knowledge in the area of this type of timely trading. Its as though this knowledge is a closely guarded secret, not to be taught Such may well be the case Some of the best, most profitable, and highly reliable trades come as a result of trading

seasonally. This book has been inspired in part by Techni-Seasonal Commodity Trading. a book by Everet Beckner. It is a book that has been in my private collection for many years, and one I have never hesitated to recommend. It is one of the two books mentioned above. Other works that may be helpful to the reader are listed in the Appendix C of this course. n In Trading Spreads and Seasonals, it is my purpose to teach you everything I can about the wonderful trading vehicles created by seasonality. I hope to go beyond anything you may have encountered in the past. This course is organized according to degree of risk rather than order of complexity. The first part of this course deals with seasonal spreads, the second part with outright seasonal trades in futures. In my opinion, spreads carry considerably less risk than outright futures trades. For those who have read my other manuals and courses and are familiar with 1-2-3 s, Ledges, Trading Ranges, and Ross :Hooks, I have spared

you from having to review (unless, of course, you want a review) these four basic trading fonnations for outright futures trades. For new readers, you will find them in Appendix A Appendix B features seasonal Decision Tables courtesy of Moore· s Research Center Appendix C lists various resources that may be of interest. Chapter 25 is special in that it deals with carrying charge spreads. Chapter 26 is another special chapter dealing with the concept of spreading day trades in order to keep them overnight. Neither the material in Chapter 25 nor that of Chapter 26 fits the concept of seasonality. However, I felt this book would not be complete without the inclusion of this important part of my own trading. Before getting started, here is a special note to the ladies: I tried to write this book in a way that is gender neutral. Ladies, it Just didnt work So please forgive the fact that I used the masculine gender throughout. It is not my intent to offend you in any way. Chapter 1 What

Is a "Spread?" If you already know what a spread is, you may be tempted to skip this initial chapter. However, I advise against it Besides being presented for those who know, it is presented here for those who are not sure, and also for those who know that they know that they dont know. I have been amazed at the number of traders who show up at my seminars who do not know what a spread is. Additionally, they do not know its numerous purposes or its many uses. A Spread is . For purposes of this book, a spread is defined as the sale of one or more futures contracts and the purchase of one or more offsetting futures contracts. You can turn that around and state that a spread is the purchase of one or more futures contracts and the sale of one or more offsetting futures contracts. A spread is also created when a trader owns (is long) the physical vehicle and offsets by selling (going short) futures. However, this course will not cover the long physicals, short futures types of

spreads. Furthermore, for purposes of this course, a spread is defined as the purchase and sale of one or more offsetting futures contracts normally recognized as a spread by the futures exchanges. 14 15 This ex~licitly excludes those exotic spreads that are put forth by some vendors but are nothing more than computer generated coincidences which will not be treated as spreads by the exchanges. Such exotic spreads as long Bond futures and short Bean Oil fu~es may show up as reliable computer generated spreads, but they are not recogruze d as such by the exchanges, and are in the same category with believing the annual performance of the US stock market is somehow related to the outcome of a sporting event. Eithe~ wa~, for tactical reasons in carrying out a particular strategy, you want to end u? with Simultaneous long futures and short futures positions or, if you prefer, simultaneously short futures and long futures positions. The primary ways in which this can be accomplished

are: 1. Via an intennarket spread 2. Via an intramarket spread 3. Via an inter-exchange spread Intermarket Spreads An intennark et spread can be accomplished by going long futures in one market and short futures of the same month in another market. For example: Short May Wheat and Long May Soybeans. ~tennark et spreads can become calendar spreads by using long and short futures in different markets and in different months. These spreads are specialize d and uncommon, but it may be profitable for you know they are available Intramarket Spreads Officially, intram~ket spreads are created only as calendar spreads. You are long and short futures m the same market but in different months. An example of an intramarket spread is that you are long July Com and simultaneously short Decembe r Com. Other unofficial methods for creating intramarket spreads are beyond the scope of this course. 16 Inter-Exchange Spreads A less commonly known method of creating spreads is via the use of contracts

in similar markets but on different exchanges. These spreads can be calendar spreads using different months, or they can be spreads in which the same month is used. Although the markets are similar, because the contracts occur on different exchanges they are able to be spread. An example of an inter-exch ange calendar spread would be simultaneously long July Chicago Board of Trade (CBOT) Wheat, and short an equal amount of May Kansas City Board of Trade (KCBOT ) Wheat. An example where the same month is used might be long Decembe r CBOT Wheat and Short December KCBOT Wheat. Offsetting Contracts Although both the long and the short futures may be entered simultane ously through a "spread broker," it is often advantageous to enter a spread one "leg" at a time. However, until both the long and short futures are in place, there is no offset and consequently no spread exists. Offsetting merely defines the difference between the futures contracts, i.e, simultaneously

both long and short futures A spread consists of two "legs." Each side of the trade constitutes one leg Long futures is one leg and short futures is the other leg. There are times when offsetting may be accomplis hed by using inter-exchange spreads employing differing numbers of contracts. Lets say, for instance, you are short 5,000 ounces of July Comex (CMX) Silver and would like to offset with an equal amount of June Silver. You could create the necessary inter-exchange calendar spread by purchasing five Mid-America Exchange (Mid-Am ) June, 1,000 ounce Silver contracts. Currency positions at the Chicago Mercantil e Exchange (CME) can be similarly offset by contracts at the Mid-Am. I can offset a long CME DMark contract with two Mid-Am D-Mark contracts Sources of Spread Information All the major US exchanges publish materials on seasonal spreads. Generally this material can be had free or, at most, for a nominal charge. 17 · For example, the CBOT and the CME are happy

to send you lovely color brochures showing charts of their exchange-recognized intermarket and intramarket spreads dating back over a period of 12 years. If you call and ask, they will send them at little or no charge Dont forget to ask for both their commodity and financial futures material. When trading spreads, I am careful to trade in liquid markets and generally reject spreads in very thin markets. However, because there is essentially no such thing as "stop running" when trading spreads, I can afford to take them in markets that are a bit more illiquid than what I normally would consider appropriate for trading. I consider the following markets suitable for trading spreads: Years ago, before the advent of computerized data bases, I used to obtain the CBOTs "Year Book." I am not aware if they still publish it, but it was chock full of tables giving actual prices for every contract for an entire year. It provided me with a complete data base of prices that at

the time was incomparable. I used that data as a historical base for creating a history of which spreads worked best seasonally. It was laborious and tedious work, but I manually entered much of the data into my old Epson QX-10 computer so I could produce an historical graph. The public library where I lived carried the Year Book on its reference shelf and I made an arrangement with the head librarian to pick up last years volume as soon as they received the latest, newest volume. Seasonal tendencies in futures change little, if any, over the years. I still trade the same seasonal spreads today as I did decades ago. Currency: There are more seasonal spreads today than there were then because there are more markets in which to trade, and because computers are able to spot very short term trends in spreads that would have been difficult and impractical, if not impossible, to detect by manual methods. Today, you can trade not only agricultural spreads, but also exchange-recognized

spreads in the currency, financial, energy, and metals futures. There is also an abundance of non-seasonal, intermarket and intramarket exchangerecognized spreads. Many of these non-seasonal spreads do have some seasonal tendencies and can be traded as seasonal spreads as well as outright spreads based on an event, fundamental knowledge, or some observable chart pattern. In addition to the material provided by the exchanges, there are also private sources of infonnation on spreads. Some of these sources, with a brief description of each, are listed in the Appendix B of this course. British Pound, D-Mark, Swiss Franc, Japanese Yen. Any of these, one versus the other, on an intermarket basis. Energy: Crude Oil, Heating Oil, Unleaded Gas, Natural Gas. Any of these on an intermarket or intramarket basis, along with the "Crack Spread." Grain: Com, Chicago Wheat, Soybeans, Chicago Oats on an intermarket or intramarket basis. Chicago Wheat and Kansas City Wheat on an intermarket

or intramarket basis. Soy Oil and Soy Meal on an intermarket or intramarket basis, and the Soybean "Crush" spread. Financial: US Treasury Bonds, Treasury Ten Year Notes, Treasury Five Year Notes, and Municipal Bonds on an intramarket basis and on an intermarket basis. (MOB spread, NOB spread, etc) Two year notes on an intramarket basis. Eurodollars on an intramarket basis. I-Bills and Eurodollars on an intermarket basis. (TED Spread) Meat: Markets Suitable for Spreads 18 19· Live Cattle and Live Hogs on an intrarnarket basis. Feeder Cattle on an intermarket basis with Live Cattle entered only as a spread. Metal: Gold, Silver, Copper on an intrarnarket basis, and Gold, Silver on an intermarket basis. Chapter2 Softs: Cocoa, Coffee, Cotton, Orange Juice on an intramarket basis. (Caution: Coffee, Cotton, and Orange Juice in particular are among the worlds most treacherous markets and I never trade outright futures positions in any of them. In this writers opinion, trades

in Cotton and Orange Juice should be avoided by non-commercial interests.) Of the above named markets, I will not take any trade that involves legging into a spread in any of the following markets: Orange Juice, Heating Oil, Unleaded Gas, Copper, Coffee, Cotton, Live Hogs, I-Bills, and Feeder Cattle. I will leg out of any of these only in dire emergencies, preferring to liquidate the trade intact, as a spread, both legs at the same time at a specified spread differential. "Legging in" refers to a situation in which both sides of the spread are not put on simultaneously. "Legging out" refers to exiting the spread one side at a time and not exiting both legs simultaneously. I will not take any trades that involve Lumber, Value Line, Canadian Dollar, or Pork Bellies. I tend to reject spreads in very thin markets or delivery months As a rule, I will not take any trades that involve spreads that are not recognized by the exchange as being a spread. However, I may talce

a non-recognized spread ifit occurs in related markets such as Soybean Oil and Soybean Meal. Why Use Spreads? There are certain advantages to using spreads. Stop for a moment and think about what they might be. Ill list them here and you will also see them discussed as appropriate throughout the course Advantages of Spreads Spreads can be insensitive to the trend or lack thereof in the outright futures. Of comse, there are execeptions. In a bull market, the front months usually outperform the back months, and in a bear market, the back months usually outperform the front months. Generally, the absolute direction of the underlying futures is of little concern The important thing is whether or not the trend of the spread differential moves favorably in the direction you would prefer. Exchange-recognized spreads carry lower initial and lower maintenance margin requirements. This is because spreads involve lower volatility Most of the time true spreads do not move as frantically as do

the underlying futures. A spread position is automatically a hedged position most of the time and therefore usually involves. less risk. Some cases of "old crop" vs "new crop" can refute this They sometimes look like different animals. Spreads serve to reduce the volatility impact of the underlying futures. In an intramarket spread, if the front month of a contract suddenly comes crashing down, it is highly likely that all the remaining months will also crash down. 20 21- The only thing the spread trader is interested in is whether or not a change in the spread differential has helped or hurt his position. Spreads allow a trader to take a fractional approach when putting on a futures position. Did you think you could do that only with options? Lets say you want to get long Treasury Bond (I-Bond) futures. After speaking with your broker, you realize that the margin for a single T-Bond trade is greater than you feel you can handle in your account. You notice

that on most days, Treasury Note (I-Note) futures generally move some fraction of the amount of T-Bond futures You also notice that the long I-Bonds, short I-Notes spread is widening. By going long T-Bond futures and short I-Note futures, you have created a fractional position in the interest rate futures. If I-Notes are moving 80% as much as T-Bonds, then your spread renders a move that is 20% of a long position in T-Bond futures. For example, ifT-Bonds move up 10 points ($31250), and at the same time T-Notes move up 8 points ($250), then the spread, T-Bonds/T-notes will have widened by 2 points ($62.50) ie, 20% ($6250 I $31250) Spreads have yet another advantage: they are convertible. It is possible to "leg out" of a spread, leaving yourself with an outright futures position. Conversion can work both ways, outright futures may be convertible to spread positions, and spreads are convertible to outright futures positions. Convertibility adds a great amount of flexibility to

your futures trading Dont tell them, but options traders think theyre the only ones who can do this. Spread trading helps the trader to avoid a lot of the noise created during the intraday market trading. Much of the intraday noise is that of stop running by the locals on the floor. There are no stops in the traditional sense with spread trades There is no stop rwming available when there is no stop order in the market. Why is there no stop rwming in spreads? Because the stop exists in the spread differential, and can be obtained by a combination of any number of futures prices. This leads to another feature of spread trading, confidentiality. When you are in a spread, and both long and short at the same time, you have no exit order in either market. If you are long Com and short Beans, there is no exit order in place other than to exit at a certain difference between the contracts Your trade is confidential. The locals have no idea of your true position or intent They cant see both of

your positions and have no reason to look. 22 Spreads, by their very nature, constitute a hedge. The economic rationale for the futures markets is to provide an arena in which risk may be hedged A futures speculator can also hedge His hedge is created by using an offsetting position He creates the offset by putting on a spread. Have you ever wanted to hedge your position but didnt know how? Spreading can, at least temporarily, stop or lessen the pain of a bad trade. There is one further, somewhat obscure advantage of spreads. It is possible in some markets to use far distant back months for the offsetting position. In other instances, where you might be involved in a back month, you can use closer-in months for the offsetting position. In a later chapter, I will show you an example of how this advantage could have been utilized to save what would have otherwise resulted in a disastrous situation in the Coffee futures. Uses of Spreads There are numerous reasons to use spreads. You

might want to pause a moment to think about what they might be. Spreads are usually, but not always, used by speculators to reduce the risk of holding a position overnight or, indeed, to lower risk at any time at all. Spreads are used by traders to take advantage of historical seasonal tendencies. Spreads are used by traders to trade sideways markets where the futures spread is trending at the same time outright futures prices are seemingly moving sideways within Trading Ranges. Spreads are also used to convert an outright futures position to a combination futures position where the trader feels for any number of reasons that it is better to carry the offsetting positions available by spreading. Spreads are also used as outright intermarket and intrarnarket speculations. Spreads are used when there is a desire to remove the effects of futures directionality or trending from a trade. Spreads can be employed to reduce the amount of initial margin and maintenance margin required to trade

a particular contract Finally, spreads can be used to reduce and greatly eliminate the effects of volatility and the resulting uncertainty from a trade. Lets briefly look at each of the above situations in order to gain an overview and somewhat deeper insight into the reasoning behind each. In later chapters, when I show how I trade the various spreads, I will probe the depths of the reasons for taking spread trades. In conjunction with the reasons, I 23· will also show you my strategies and the tactics by which I carry them out. Keep in mind, it is entirely possible to lose on both sides of a spread. Reducing the Risk of Holding a Position I~ is not.~co~on in !iqui~ or illiquid markets f~r a floor trader to hedge his positron by spre~ding off agamst the same market m another month, or against a re~a~ed market m the same month I have seen this kind of floor trading tactic in such 1lhqmd markets as the Value Line, and even in more liquid markets such as Soybeans, Eurodollars,

and Bonds. In fact, arbitraging through spreads in distant back months by financial traders is commonly done while greatly reducing risk. If floor traders think its important to "spread off," dont you think its important for you to do the same thing? Value Line floor traders, in an effort to make a market, will take the opposite side of an entry order c om~g in from off the floor. Then, because volume and liquidity are so ~embly low~ this ~ark~t, the Value Line floor trader will offset his position by ~aking an opposite posttlon m the S&P 500. By doing so, he has hedged his risk It 1s not uncommon for a floor ~~der in the Soybean pit to offset and hedge his risk by taking an opposite equtty pos1t1on m Soybean Oil or Soybean Meal. Financial floor traders will hedge risk by spreading intermarket contracts and intramarket back month contracts. Often these are not perfect spreads and often they are not spreads recognized by th e exch~ge as such. Nevertheless, they are

regularly used by floor traders and are 1llustrattve of the use of spreading off as a means to reduce risk and thereby create a hedge. Off-f1:e-floor traders can also hedge risk by use of offsetting positions to be held o~e~~t. Bo~ daytraders and position traders can create spreads that considerably lil1llllll1Ze the nsk of a position that might be held overnight. Day trades can be converted to position trades by spreading Position trades can be held considerably longer at less risk by spreading. Taking Advantage of Historical Seasonal Tendencies Probably the most common use of outright spread trading is for the purpose of taking advantage of the seasonal tendencies that occur in various furores markets. Trades with a high probability of being profitable can be entered this way. Trades with success probabilities in the 80th and 90th percentiles are quite common among seasonal spread trades. Seasonal spreads are not exclusive to consumable commodity futures. They occur in the currency

and financial futures markets as well. The proof of the reliability of seasonal trading is extensive. In fact, not that many years ago it was the mainstay of many a successful trader. Knowing when tlie markets are following their normal seasonal behavior and taking advantage of the fact is one of the safest and surest ways to trade the futures markets. One has to be patient and restrained from greed when trading seasonals. The reward is well worth the effort Trading in Sideways Futures Markets It is not unusual for a particular futures market to be moving sideways. Experts have stated that markets spend approximately 85% of their time with their prices moving sideways and not trending. Whereas overall markets may be moving sideways, there is often a trend occurring between different months of the same underlying futures or the same or various months of related futures Markets that tend to incur long periods of congestion may very well be trending when a front month is offset against a

back montli. One month may be moving sideways with an upward bias while another month is moving sideways with a downward bias. The difference gives rise to a spread trend and an opportlmity to profit from the spread differential. Converting an Outright Futures Position to a Spread Quite often an outright futures position can be converted to a spread position. The result can be less risk and will require less margin. I have entered such conversions in my trading and have witnessed what would have been a loss, had I held outright futures, tum into a profit by way of conversion to a spread. Trades of this sort will be illustrated later in this course. Ending up in a spread has usually been the result of a need or willingness to hedge. The resulting profit has often been greater from the spread than it would have been had an outright futures position been maintained. Have you used this privilege in your trading? Outright Inter-Exchange, Intermarket, and Intramarket Speculations A spread

trade is often entered witliout tlie benefit of seasonality as an outright This may be done iiS a counter-seasonal trade due to spread position. 24 25 backwardation in a market. Any news event, rumor, fundamental fact, or technical formation can cause a trader to enter a spread based on the merits of his ascertaining that a spread trade would be in his best interests. Outright spread trades may be entered when it is unknown which way a market will break from congestion Once the break has occurred, the losing side of the spread is dropped and the winning side is maintained. Entire strategies and the resulting tactics needed to carry them out can be built around outright spread trades. spread trades much lower than those for outright futures trades. Spreads are generally fractionally less volatile than outright futures positions Any time a spread is trending, sufficient reason exists to consider entry via the spread method of trading futures. Should it become advantageous, any

spread position can at any time be converted to an outright futures trade by simply dropping the losing side of the spread. Every spread trade carries in it the elements of hedging, and the elements of risk. Hedgers require less margin to trade because they are both long and short the same or a related commodity. That is one reason why, with a few exceptions involving related markets, we do not advocate exotic, exchange-non-recognized spreads for purposes of this course. Lowered margin requirements are a major positive reason for entering spread trades. Lower margins can mean more opportunities to enter or add to positions in the same market or to diversify through additional positions in other markets. If you are trading a small account, are you aware that spread trading may offer a way to obtain more trading opportunities? Removing the Effects of Directionality Reduce and Greatly Eliminate the Effects of Volatility and Uncertainty Spread trades are not fully dependent upon the

trend or lack thereof of the individual futures of which they are comprised. Rather, they are dependent upon the trend of the spread differential itself. This is why, even when markets are not trending, a spread trade can make money from the trend in the spread differential. However, spreads can also make profits in trending markets. If the long side of a spread trade trends higher and faster than the short side of that same trade, profits will be acquired by virtue of the upward trend in the spread differential. As stated above, it is the hedging nature of spreads that can reduce risk and margin. This reduction is directly related to the lessened exposure to volatility that may be carried by spread trades. If you are both long and short the Japanese Yen and it explodes into a 500 point price rise in a single day, you may profit if the long side of the trade moves up more than the short side. If the opposite is true, you will lose only fractionally the amount you would have lost if

you were holding an outright short futures position. The long futures will always mitigate the effects of any loss you might be taking on the short side of the spread trade. In like manner, if the short side of a spread trends lower and faster than the long side of that same trade, profits will be acquired by virtue of the upward trend in the spread differential. This may seem confusing, but it points out the fact that the trend of a spread can be up even while the two legs of the spread contract are plunging down. Both Sides of a Spread Can Win or Lose Disadvantages of Spreads Since Ive been listing the advantages of spreads, it is only fair that I list the disadvantages of spreads. Nothing in life is perfect Spread trading is not totally without some drawbacks. You wouldnt want me to pretend there are none, would you? Reducing the Amount of Initial and Maintenance Margin Probably the greatest disadvantage in the minds of some traders is that trading spreads limits profit

potential. Of course, this is true When you limit the risk in a trade, you usually end up limiting the amount of profit available in that trade. Limited profit potential must be weighed against the benefits and advantages that accrue to a trader who utilizes spreads. Exchanges recognize the reduced risk of spread trades and the corresponding reduction in the effects of volatility by making the margin requirements necessary to carry Another disadvantage in spread trading is the limited amount of written information about spreads. There are few books indeed that cover the subject One of the While on the subject of directionality, keep in mind that directionality of profit or loss is another matter. It is entirely possible to be profitable on both sides of a spread as well as to be unprofitable and actually lose on both sides of a spread. 26 27 reasons for my preparing this course is to provide an in-depth treatment of the subject of spread trading. Ordering of spread trades is

another draw-back for many traders. It takes a greater effort to place a spread order than other types of orders. Although the ordering of a spread trade involves no more than a few additional words, this seems to be an insurmountable obstacle for those not willing to make the effort. I believe this degree of reluctance derives from the fact that traders are not sure of themselves when it comes to placing spread trades. This lack of certainty revolves around not understanding the mechanics of ordering, and also a lack of understanding of how spread trades work. Ignorance in this area is not solely in the realm of the trader. It also involves the broker. This leads to another disadvantage of spread trading, broker uncertainty Ive been amazed at how few brokers know anything about how to place a spread order. Therefore they are sometimes of little help to the trader seeking such information Thats too bad, isnt it? Perhaps the final disadvantage of spread trading is fow1d at the spread

desk itself. For spreads that involve the existence of an actual spread desk, i.e, spreads like the TED spread which involves a spread across two markets, and therefore trades at an official TED spread desk of the International Money Market, there is a loss of the confidentiality that is available were the trader to avoid the spread desk and simply leg into the spread trade I feel that it is often better to leg into spreads, especially where the trader has the time and resources to observe the market and enter at a more propitious differential. The back office computer is oblivious to legging in. It cannot tell whether the spread was entered as a spread or was entered by legging-in. Chapter3 How to Trade Spreads to Reduce Risk As previously stated, off-the-floor traders can hedge and reduce risk by offsetting positions to be held overnight. Both daytraders and position traders can create spreads that considerably mmimize the risk of a position that might be held overmght. Daytrades

can be converted to position trades by spreading (see Appendix C for an example). Position trades can be held considerably longer at less nsk by spreading. Lets take some real examples so I can show you what I mean . ! I I 20.SOO l tf ((if hi tl dose,![ f rl l[ [ [lttrff[ [ff /Profitable here, hedged before /Report due out after market close 1 111 I Lon~ o;- breakout tt r~ l tf ttf~rii!HfttIll I lj Ir 11ft, f1 20.oso 19,600 I!-tj/1 rtl~ r i lLtf!} 19. 150 l litrt 16.700 18. 250 [ l?.800 ll 17. 350 t 01 28 15 02 16 30 13 2? 29- 11 25 08 22 16. 900 I want to make sure before entering my outright long Crude Oil futures position that I have a possible way to hedge should the trade require such tactics. I knew before entry that the AP! report was due out soon. So prior to any entry, I ascertained that the spread was neutral or favorable to me should I need it to hedge and thereby reduce any risk I might have in the trade. So far as I knew, I

might have to hedge the trade on the very first day, or on any subsequent day. 20.500 lrill1 If tr I j Profitable here, hedged before dose,1[ Report due out after market dose , 1ft Long on breakout )rr1f fi }r 111 r1l/1l fI ffirl rl (III f[ t 20.050 1 19, 150 19.600 H[1[ 11t - t ff, ii j f) 1/rft[ w ,fl 1/ [kif t ltl il ,tr 18.70G I l JL i i 11l [ l 16.250 1~. soc 7.3so 1 ~}( I ! I - " , . I --1 Dec. 22 / r 6.900 --o-1--1-s--0-2--1-6--:-,0--1-3--z-7--1-1--2-s- oa / j I / ( / .0600! .04001 -0 ~ , / / ~ ~-~ -0 .10001 I Some time ago, I was long Crnde Oil fotures based upon a position trade entry. After a few days, 1 was showing a nice profit However, the report by the American Petroleum Institute (AP!) was due out. If the report were negative, I stood the chance of losing any profits I had made and possibly of incurring a loss. At times, the Crude Oil market reacts ,1olently to the API report, and in my earlier years I often

took a beating when such things happened. As an item of interest, another event that often rocks the Crnde Oil market are the rumors (news?) that occur just before, during, and immediately after OPEC meetings. At this point, I need to back up somewhat and show you something I do on position trades in anticipation of the fact that I may at some time have to use a spread to reduce my risk. Prior to entering the Crude Oil trade, I looked at the spread among the most liquid Crude Oil contracts to see which, if any, were trending in a way favorable to me should I find that I need to offset my long Crude Oil futures with a short Crude Oil futures. Why do I do this? :!i!i! -0 . 04001 -0.06001· V L 30 I .2600! ·;~;~·;~::·· ,o.ru] j f I This is how the spread looked at the time I was I I ,.,,, ,, ,, ,,, ,,,, ,,, ,,, ,,,,,,"",I , , , , , I I " I " , r I II , I I I , I 111 I 11 -0.1200/ -0.1108 -0 .16001 -0 .18001 -0.20001 II •1- 1 1 ~1

How to Chart a Spread As you can see, at the time I needed to know about the spread, it was fairly neutral between the two contract months I decided to use. When you chart a spread you subtract the closing prices for the month you want to be short from the closing prices of the month you want to be long. The result should display a graph that is moving up, indicating the spread is working in your favor, or a graph that is neutral, indicating that, at least for the moment, the spread is not working strongly against you. Next, lets look at both the outright futures position and a continuation of the spread chart so you can see what happened at the time I needed to actually enter the spread in order to hedge my position. 31 20.500 20.050 19.600 19.150 On the chart at the top of the preceding page, Crude Oil futures prices reacted negatively to the API (American Petroleum Institute) report. Prices went down for aperiod of three days following the report During that time, the spread

went against me for a few days. You can see it on the chart below Did you notice how the graph line of the spread went down soon after I put it on? However, had I not hedged my risk by using the spread, I would have ended up giving back virtually all the profits I had previously made in the trade, and could very possibly have been stopped out with little or no gain. 18.700 . 18.250 17.800 This is how the spread looked the day I put it on 17. 350 This is how the spread looked the day I entered the futures trade 16.900 Dec. 01 02 15 16 30 13 27 11 25 against me This is how the spread looked the day I put it on • II I " I • I . I II " I " I I I I " I " I II I I I ii II I 1111 II ii 1111 I I I I I I111 I II This is how the spread looked the day I entered the futures trade Spread went against me II I I I I • I I I I I I I I II I I I I I II I I II I I I I I I I I 11 32 ii 11 II .180 .1600 .110 .1200 :~==10j

. " :~:~01 .200 22 08 III ii 11111 .120! .100 .380 .360i .340 .3200 .30001 .280fil .2600 .0600 .040 .020 .0000 -0.020 -0.040 In terms of numbers, I entered the spread when the difference between the long and short futures was 12 points ($120). The worst the spread ever moved against me was to a differential of 6 points ($60). My greatest risk for the entire time I held the spread was only $60. Had I remained long futures, it would have required me to maintain a protective stop of 124 points ($1,240) to prevent my being stopped out of the trade entirely. The futures numbers are as follows: I entered my long futures at a price of 1880. The market moved as high as 1996 At that point I had 116 points, ($1,160) of unrealized paper profits. After the API report came out, prices moved down to 1873. 33 I would have needed a stop at 1872 in order to stay in the trade. Instead of risking $1,240, the spread allowed me to risk only $60. Once prices moved my way again, I could

have dropped the short side of my spread and stayed long futures for a maximum gain of an additional 57 points ($570). Had I not dropped the short side of the spread, my additional maximum possible gain would have been 26 points ($260). Of course, one rarely gets the maximum possible gain. The spread at its widest shown below was 38 points. Since I entered it when it was at 12 points, the most I could have gained was another 26 points. Maximum possible gain for the spread-;-;J This is how the spread looked the day I put it on This is how the spread looked the day I entered . , II ,, .i • , , I I , . II ,, 1 , 1 , I , I , " , " i1 1 111, 1 ii I IIII I III11II 111 111 II My main concern was the direction of the trend in the differential. The hedge itself was an intramarket calendar spread. Since markets were created for hedgers to be able to reduce risk, as a speculative trader I was also hedging risk, thereby fulfilling the economic purpose for which futures markets

exist. Risk Reduction Considerations This particular trade worked out quite well. The only thing that could have been more reassuring at entry would have been to have seen a rising trend in the spread itself. . 4200 .4000 .3800 .3600 .3400 .3200 .3000 .2800 .2600 .2400 .2200 .2000 .1800 .1600 .1400 .1200 .1000 .0800 .0600 .0400 .0200 .0000 -0.0200 -0.0400 This is haw the spread looked at the time I was ready to enter my long Crude Oil futures position. .2000 .1800 .1600 .1400 .1200 .1000 .0800 .0600 .0400 .0200 .0000 34 -0.0200 -0.0400 -0.0600 -0.0800 given me more confidence at entry time I • I I • " By hedging my long futures via the technique of "spreading off," I sharply reduced my risk. Admittedly, by staying in the spread I also reduced my potential profits to a degree dependent upon how long I stayed hedged. However, from the point in time that I entered the spread by shorting a back month of Crude Oil futures, my margin requirements had

been greatly reduced. Directionality of my long futures was no longer a factor in the trade. .2600 .2400 .2200 " I II " II I I I 111 I I I I I I I 11 I I I 11 I I I I I Ii I I I I -0.1000 -0.1200 II II11 ii 1111 I I -0.1400 -0.1600 -0.1800 -0.2000 Many days may pass and the trend of the spread can change between the time I enter an outright futures position and the time I decide I need to spread off in order to hedge my position and reduce risk. However, at the time of entry I have no idea of when I will need to use the hedge. There have been many times when the hedge needed to be put on the very same day as the day of entry into my outright futures. So whenever possible, I look for the spread trend to be up. 35 · If chart shows the spread trend is moving sideways and is only neutral, I will think a lot harder about whether or not I can use this technique. In tum, this will affect whether or not I choose to enter the trade at alL If at the time of

entry the spread trend is opposite of what I need it to be and trending dovm, I may reverse the way I enter the trade and go long the month I would normally have sold short and go short the month I would normally have bought long. Let"s look at that situation now H-:r-: is a trade in Com: ~~~------- CORN - Do you see the pronounced dovmward bias to this spread? -2011.00 -2051.00 -2058.00 -2065.(10 -2072 .00 -2079.00 -2086.00 -2093.00 -Zl(J0.(10 -2107 .00 -2114 .130 -------. ~ i I l2s.sco -2121.IJIJ -2128 .00 -2135.00 -2142.00 -2149 [}0 -2156.00 I 128,000 I f27.SOO I -2163.00 -2170.00 -2177 .00 -2181.[)0 -2191.00 -2198.00 -2205.00 l27.COO i r26,5CO 26.000 J I 11, I I 1 :s.soo 25.000 24.500 22 I 09 L 23 J 06 21 O? 21 F 04 18 02 16 Dec J I I I I " I i I II I I Jan I I I I I I I I I I I , I I I I I III I 11111 1111/ CZCK was hardly conducive to my w;:rnting to enter a long position in December Com. It had been falling

for quite some time, and the spread differential had Just broken to new lows. I then looked at CZ/CN to see if it would be any better. A My intention was to go long December futures. During the month of March prices took out the high indicated by the arrow. As a precaution, I looked to see how I might protect myself and lower my risk should the trade go against me. The normal thing to do would be to buy December futures and look to short another month for a positive trend in the spread. I looked at the spread differential between the May and December contracts, and I looked at the spread differential between the July and December contracts. When I charted the possibility of creating a hedge trade, the spread appeared as you see it on the chart on the following page. 36 I feb Mar ~~~~~~~----------------- 37· Based on a comparison between CZ/CN and CZ/CK, which spread would you have chosen to enter? CZ/CN The spread was more negative I 11111 I I I 11 l I I I I I 11 I 111

I I I 111 Dec Jan ii II I I 111 I II 11 III I I III I I IIII111 I I II I Feb When trading futures I like to have every possible element of the trade favoring my chances for success. Even \-1th the precautions I take, things dont always work out the way I plan. Sometimes the trade goes against the best of my plans Recently one ofmy students, Ill call him Jay, found himself in trouble on a trade. Lets look at that trade now. -208&.00 -2093.00 -2100.00 -2107.00 -2111.00 -2121.00 -2128.00 -2135.00 -21i2.00 -2119.00 -215&.00 -21&3.00 -2170.00 -2177.00 -2184.00 -2191.00 -2198.00 -2205.00 -2212.00 -2219.00 -222&.00 -2233.00 -2210.00 -2217.00 I Mar wz 41.750 I l! tI l rt r dr-t1!1r1 f r r, tqt . r q-irt rqf 1lttr lr[[f / 41.000 40.250 39.SCJO 38.750 38.000 37.250 tti 36,500 35,750 05 12 19 Apr The spread CZ/CN appeared more negative than CZ/CN. On the basis of the spread chart, I decided to enter long July and short December Com. Although I never would

have had to hedge my long July position, if I had, the spread kept going in favor of long July Com until just a few days before first notice day. 38 26 03 10 May 17 24 31 07 14 Jun Jay was long December Wheat, and in late June the market looked as you see it on the above chart. Prices had begun to be more volatile with the daily range on average becoming greater The market appeared to be choppy, and he feared that it was beginning to top out. Jay wanted to protect his position by hedging it via a spread in which he would offset his long December Wheat by going short July Wheat. At the time he originally entered the trade, the spread December over July was steadily working in his favor and looked as you see it on the next page. 39 · WZ/WN 24.000 23.50 23.00 22.500 22.000 21.500 WZWN 25.0 24.00 23.00 22.000 21.00 20.00~, 19.00~ 18.00! 17.00 16.000 15.0091 14.0001 13.0001 12.00el 11.000 10.0001 9.00001 8.00001 7 .00001 &.0000 5.0000/ 4 .00001 3.00001 2.000 20.500

21.00! 20.000 19.50 19.00 18.50 18.000 g::~0: 16.50 16.000 15.5 15.000 14.500 14.000 13.500 ,, .i, ,, 11 rd ii 111111 I II I ,J Ii I II /Ir II I Mar I,ii Apr IJ 1111 J, I II Iill I !1111 ii 11111 May Iii 11111 Iii 1111111111 13.00 12.500 Jun ,1111,l1111,11,l11l,11l1111il,11l1lill1111l1III lllil111l111111l1iilll1l1llillll1111l111111 That night, about 10 minutes before the close, Jay offset his long December Wheat by shorting the July contract. In his estimation, he stood to make money by dropping the hedge should Wheat continue to move up He felt that if it stayed in a choppy trading range, or topped out, he would continue to profit from the spread, which had been working in favor of December over July for quite some time. Unfortunately for Jay, the markets suddenly changed and the spread began to move rather strongly against him. Apr Jun Mall Jay now had an important decision to make. Since the spread was working against him, he could choose to exit the trade by

liquidating both his long and short Wheat positions. He could choose to go back to his original position by dropping the short July Wheat position and staying long the December contract. His final choice could have been to stay hedged by continuing to hold the spread. Before I tell you what Jay did, let me ask you what you would have done? Within a few days, Jay found himself looking at a spread chart such as the one you see on the following page. 40 Jul 41 - wz In this case, Jay chose to exit the position entirely because he was no l~nger comfortable with it. That choice turned out to be a "middle of the road" dec1s10n Had Jay stayed with the spread, here is what would have happened to him. 46.250 If 111 f WZ/WN IIl ,1 1/1/ f11ft1j I l11ll I l t tf 45.000 43.750 42.500 41.250 40.000 I 38.750 rrr1 1trrflrtrlr 37.500 i 36.250 01 08 15 May 22 29 05 12 19 Jun 26 03 10 Jul I ii11 I 1 I 11111 I I I I I I I I I I 1111 I I , I Apr I ii I I

I11 I 11 I I I I11 I I! I I I 11 Il IIII II I II 111 I I I I II11 IJu11 I1I II 11111 Jun Ma4 If Jay had chosen to stay long December Wheat, he would have made more money as Wheat prices moved 42 points higher before forrnmg a Tradmg Range. Had Jay been able to get out at the very top, he would have made $2,100 m?re per con~act than he did. However, Jay was correct in detecting that the move Ill Wheat pnces was almost over. Would the additional gain have been worth being uncomfortable with the trade? Only Jay could have made that decision We each have our own level of comfort. Jay traded within his comfort level He had made profits and he took his profits. Any time a trader chooses to take profits, I will applaud that Summarizing Risk I want to make sure you realize that spreads can be, and are used, to reduce risk. I also want to be sure you understand that it is possible to lose on both sides of a spread trade, once it is entered. It is entirely possible for the long side of a

spread to begin to worsen your position relative to the short side of that spread. When that happens, under certain circumstances, you could find yourself losing more, by way of a spread trade, than you would have in an outright futures position. decision. 42 43 Chapter 4 Seasonal Spread Trade Selection Seasonal spreads are among the best trades possible for those who are willing to wait for these excellent opportunities to come along. They have the advantage of a very high degree of reliability over a penod of many years. Trades that work 80% or more of the time are certainly worth taking Many of these trades work 100% of the time for periods spanning 15 years or more Yet seasonal spreads must be filtered in order to obtain the very best results. A lot of money can be lost by blindly taking these trades based upon computer generated dates for entry and exit. Seasonal spreads can be heavy losers in those years when they fail to work as predicted by computer generated studies.

Even in those years where a seasonal spread does what it is expected to do, it can also work strongly against a trader, resulting in substantial losses if it is entered or exited at the wrong time, or under the wrong conditions. In the first chapter, I showed you ways to discover seasonal spreads. In this chapter I will show you how I filter them in order to get the best results. My filter is simple, as you will soon see. My entry technique usually gains me a better entry than one based solely on a computer generated date. I will also show you how I exit seasonal trades. My exit technique generally results in greater profits than those obtained by exiting the trade based solely upon a computer generated date. In all fairness to those private services which provide computer generated entry and exit dates, let me say that those dates are given by them as approximations with adequate warnings as to the fact that they do need to be filtered. 44 The Filtering Process My filtering

process is simple, and threefold I check to see if there is any fundamental reason for the spread to behave abnonnal1y. In the case of a consumable item, I want to know if there is a current supply shortage of one of the underlying commodities. In the case of all contract items, I want to know if there is any news or market s1tuat10n that might affect the trade Im about to enter. I enter a proven seasonal spread during a time window covering ten trading days pnor through ten trading days subsequent to, the usual entrv date for the trade, a total time window of twenty trading days. , I enter the trade based upon a signal from a simple chart pattern. If such a signal does not appear, I refrain from entering the trade regardless of the probability of siiccess. ff I miss a good trade because of a failure of the chart pattern to appear, I simply consider that this seasonal trade did not have mv name on 1t It is also possible to purchase computer databases containing daily prices going back

for many, many years, in some cases as far back as the beginning of trading of a particular contract. Such data can then be massaged to show the outcome of spreading one futures contract against another. Here is an example of what is involved in identifying seasonal spreads. A spread Ive been familiar with for many years is to get long CBOT Com and shon CBOT Vheat around the first of May. The reason for entry into this particular spread is that Wheat prices generally tend to be pushed dovn.1 by the commercial interests, in May, just ahead of the harvest while at the same time of year the quality and quantity of the future Com harvest is wlknmvn. This spread works more than 90% of the time over a period of years The Com/Wheat spread works even in years when Wheat prices are rising, as long as Com prices are rising more strongly. Weekly Corn/Wheat However, in order for you to appreciate my filtering process, l want vou to m1derstand what is involved with selecting a seasonal spread. The

conclusi~n of the matter is that the simplest, easiest way is to employ computer generated seasonal spreads that have been proven to work over a period of many years. After all, my job is to spend my time making money trading seasonal spreads, not researching them as I had to do in the past. I ( This is how it looked the following year. / Remember, this is a weekly spread chart. That seemingly small move was a move of 15. 75 points At $50 a point, that move was worth $787.50 I I I I I I I I 11 I I I I I I I I I I I 11 I I I I I I I 11 I 1111 I I F 46 v/ This is what the spread looked like one year. Considerations in Manual Selection of Seasonal Trades To identify a seasonal spread, it is necessary to ascertain the relative action of the underlying futures contracts. This is no easy task To accomplish this, I must have charts or data of how the underlying contracts have behaved in the past. The exchange brochures are excellent for viewing past price behavior over a period

of many years. Yet it is extremely difficult in some years to visually see the spread between two bar charts, unless prices are charted as a spread 1Jy~ vV , ~f,vV, ~" H A H J J -A S O ii ii I N 47 · III D ii I I I I I I ii I J F H I I 111 I 11 I I I A H -45.000 -50.000 -55 .008 -f,0.000 -f>5.000 -70.000 -75.000 -80.000 -85.000 -90.008 -95.000 -100.00 -105.08 -110 .08 -115 .08 -120.00 -125.80 -130.00 -135.00 -140.00 -145.08 -150.00 -155.09 -160.08 Looking at Com prices over the same twelve year period, I can see that Com prices generally rose in seven out of twelve years. From this we can see that in some years Com and Wheat prices have a tendency to diverge during the month of May. d=close down from monthly open u=close up from monthly open ~ooking over a multiple year period, I can see that Wheat prices generally dropped m the ~onth of May, eight out of twelve years. On the sole basis offalling Wheat pnces m the mon~ of May, the spread would

succeed only 66.7% of the times as lo~g a~ ~eat p nces fall fast~ ~an Com prices. So just looking at falling Wheat pnces 1s msuffic1ent for detenrumng the probability that the spread might work. Monthly Wheat d=close dawn from monthly open •""" "P from monthly open 45.000 ~ Monthly Com ~ 32,750 l;~ 40.000 r~ ~[l~~l, I~ f /~ ~ ~r~ 42.500 ld 35,250 ~ ~J~~ I ~ 1l~ 30,250 l~~ di~~~.~ 31 31 31 31 31 31 31 31 31 48 d 30.000 1 2?.500 25,000 31 31 31 31 31 31 25,250 22,?50 20.250 15.250 31 31 31 31 31 31 31 32.500 t[t ,~~~ 31 27.?50 17,750 ID~ 1 3?.500 r I ¼i V 35,000 u I 31 From that analysis, we can begin to see why this spread has a tendency to work as Long Com, Short Wheat. However, were I to select this spread based only upon the years that Com prices rose and Wheat prices fell, I would have had only a few opportunities to make the trade. The fact is, only four times in twelve years did Com prices

rise while Wheat prices fell. Analyzing the charts, can you see that there were three years where both Corn and Wheat prices rose, four years where both Com and Wheat prices fell, and five out of twelve years where the trend in Com and Wheat prices differed? Of those five, Com prices rose four times while Wheat prices fell and Wheat prices rose once when Com prices fell. Obiously, the safest trades came in the four years when Com prices rose while Wheat prices fell. 49- However, that does not account for the high percentage (over 90%) of years when this spread worked. The only conclusion is that in years when both Com and Wheat prices fe!L Vheat prices fell more dramatically than Com prices. In the years where both Com and W11eat prices rose, Com prices rose more dramatically than Wheat prices As a matter of fact, the only year when the spread didnt work was the one year when Wheat prices rose and Com prices fell during the month of May The result 1s that if this spread trade were

entered and exited correctly during the twelve years shown on the chart, the trade was successful 91.67% of the time The chart is right below you, take a look. CNMN -75.000 -76.500 -78.000 -79.500 -81.000 -82.500 The fact of the matter is that the two, Com and Wheat, must be looked at together and the amount of rise and fall in prices must be looked at relationally. This is extremely tedious and difficult to do without the aid of a computer -84.000 -85.500 -87.000 -88.500 -90.000 -91.500 -93.000 In the Com/Wheat spread l will show, Wheat was in short supply from the previous years harvest and therefore the spread would not work. Could you see that this was going to be the case simply by looking at the spread trend prior to the time JI 1s normally entered 7 -34.500 -%.000 -97.500 -99.000 -100 .50 -102 .00 -103 .so -105.00 -106.59 -108 .00 -109 .50 ,,,, ,,11,1,,1,,,,, ,, 11,1111,,11, ,11,11111111,, 111,,1111111l1llil11ll11l11!11illl!il1,11l11 Feb Mar Apr May When I

consider the CN/vVN spread, I look at a window in time beginning ten trading days before the first Monday in May, and up to ten trading days after the fust Monday in May. Ten trading days prior to the first Monday, the spread was moving sharply upward. However, I did not see an entry signal during that tin1e (1 will be showing you my pattern entry signals a bit later in this course). By the time prices were five trading days prior to the first Monday, prices began moving d0\11. From that time until ten trading days after the first Monday, the trend of the spread was counter-seasonal and no entry signal was given. Looking at the two charts on the following page will show why the spread was not following its normal seasonal tendency. 50 51. ! H DAILY 2:66.88 264.08 Chapter 5 262,08 2UL08 258,80 256.88 2S4,06 252,08 Filtering Process: Checking the Fundament als 258.00 248,00 346,e,e 244.08 l,, I I I """ H I>AILl 374.08 370,08 The first step of my

filtering process is to check everything I can about the fundamentals of the underlying futures contracts relative to the time of year I propose making my entry. 366.21ft 362.00 358.08 354.08 350,80 346,80 342.08 338.08 334,e,0 I Har, I I I I I I I I I Apr I I I II l I I I I, I I I I I I I I Na~ I I I I I I I I I 330.00 During the twenty-day (bracketed) window in time when I considered entering this trade, Com moved up 3.5 points However, during that same period, Vbeat moved up 8.25 points The non-seasonal differential caused CN/WN to trend the wrong way. For me, this means looking at the most basic of fundamentals. Ive often said that as an individual trader I cannot hope to compete with the large commercial interests in gathering fundamentals. That statement remains true today Why? Because the large commercials can afford to have agents worldwide who can go out in the fields and examine crops, research intended plantings and actual plantings, pore over

government and private reports of crop conditions, weather, soil conditions, insect infestations, etc. However, there is certam fundamental information available to the individual trader and, in fact, with the news reports available via a live data feed, there is more information than I can possibly handle or want to know. Checking Fundamentals: Weather It doesnt take a great deal of effort to turn on the news and find out the weather, not only in ones ONn country, but all over the world. If there is flooding or drought in the Midwest that will affect the grains, it doesnt take much effort to find out about it. 52 53 If there is a freeze in Brazil that could affect coffee or soybeans, it doesnt take a lot of research to be informed about that either. I can qmte easily find out if the Silver miners in Mexico are threatening a strike. If there is trouble in South Africa that might affect the mining of gold, it will be part of the news. If OPEC is planning a meeting, energy prices

are likely to be affected, and its not difficult to find out. The news WJ!I carry tales of unrest in the Ivory Coast that might affect the supply of cocoa beans, etc. The point I am making is as old as the hills, "LOOK BEFORE YOU LEAP." This pomt is in keeping with my old adage, "Trade what you see, not what you think." Any oddity in the weather 1s going to cause me to take a hard look at a proposed spread trade in a commodity that is eaten by someone or something. I am going to see if the underlying markets appear at all nonnal individually and relative to each other. Im going to take a hard look at the inter-exchange, interrnarket, and intramarket spreads as is appropriate I may even consider entering the spread inversely Im also going to look for the next item Checking Fundamentals: Backwardation One of the easiest things to spot is the reversal of the natural order of prices. This reversal is known as "backwardation" and can be seen in any newspaper

that features a section carrying futures prices. for all futures contracts except interest rate contracts, the normal carrying charges (insurance, storage, interest) usually cause prices in the later (back) months to be higher than prices in the nearer (front) months. However, when some change in the fundamentals occurs to cause excessive demand in the front months, the prices in the front months may rise higher than those of some of the back months, causing bacbvardation. Backwardation can be caused when someone is willing to pay a premium today to get something that they fear may be much more costly later on. With regard to backwardation, the experts at Moore Research state: "In certain markets (live cattle, crude oil, heating oil, e.g) this phenomenon provides the very foundation for some seasonal trading and spread strategies wherein deferred contracts tend to rise toward cash as front months expire. (We found this to be the case when analyzing contracts included in the CMEs

GSCI. Note how rarely cattle producers are able to place foxward hedges without doing so at progressive discounts to cash)." 54 If I see backwardation in anything but interest rate futures (where it is normal for contract prices in the front months to be higher), I am immediately alerted to the fact that a normal seasonal futures trade may not be profitable. In fact, such a condition may cause me to consider going opposite to the seasonal tendency. Notice that I used the words alerted and consider. As stated by Moore Research, backwardation is the underlying cause for many seasonal futures trades. Backwardation in the interest rate contracts is the opposite of that in the commodities. The back months become higher in price than the front months Backwardation there will also cause me to be alerted to potential problems Checking Fundamentals: Position of Commercials and Large Traders There are two sources I can look at to see the position of the major players in the markets: l.

The exchange issued ·Position of Large Traders Report" 2. The open interest of Put and Call options on futures The normal position of commercial and large traders is to be short the various commodity markets, and long the interest bearing financial futures. Vhat I am concerned with is if the "big guys" decide to get long commodity futures (short financial futures) This situation may or may not occur in conjunction with backwardation. Getting long commodity futures means the large traders arc buying futures or selling Put options Getting long interest rates means getting short financial futures. To do this the •big guys" are selling financial futures, and buying Put options. If a major shift in open interest does occur, I will reconsider any proposed seasonal spread trades, and may even consider a reverse spread entry. The Position of Large Traders Report This report is issued once a month by the exchanges. 55 It is not a timely report and is issued two

weeks after the data are known. It becomes increasingly less reliable as time passes and the next report is due However, for purposes of spread trading, this report is fairly adequate. The Position of Large Traders Report is available by calling the exchanges and is available from data services that carry news reports. Put and Call Open Interest A current view of the position of commercial and large trader interests can be ascertained by looking at the Put and Call open interest in options for the individual contracts that arc going to be included in the seasonal spread. The reason for checking this factor is that the large traders and commercials are the parties ,vho write and sell most of the available options in any market Put and Call open interest by month is not generallv available m newspapers. As far as r know, it must be obtained commercially from data services that carry the daily reported figures Availability probablv includes every live and end-of-day data service, because

the exchanges release open interest by contract along with volume and prices on a daily basis. (By the way, futures and options volwnc and open interest figures are always reported a day late.) Im going to show you what r see and what I look for on my computer screen. Suppose I had a seasonal trade to get long the September contract for US 30 Year Bonds (T-Bonds) and short the September contract for US 10 Year Notes (TNotes), also known as the NOB Spread (shouldnt it be called the BON Spread?). Assuming there is no news that would prevent me from taking this trade, I would then begin examimng the options open interest for bonds. First I would look at the open interest of the near and at-the-money strike prices in the September T-Bonds. Since the commercials are usually short interest rates, the normal position for them to be in the T-Bonds would be to be short Puts or long T-Bonds. Remember, interest rate markets are upside down from the commodity markets For the market to be normal,

there should be significantly more Put open interest than Call open interest. If this were not the case, I would be alerted that there may be something abnonnal going on, perhaps something I have not picked up from the news. 56 f(t]w!i 1Jli1CIJQllm@ HIGH LOH OPEN UOLUKE OPEN INT. IICK UOL. 4 3 2 3 1043 4552 4 4 4823 7145 9.0000 +0.0000 18.000 -1.000 10 8 9 1526 19351 18 20 2746 7292 :rn . 36 36 36 6370 13008 . i00 Hl0 100 2157 9256 IICH TIME BID BID SIZE ASH ASK SIZE 52HK HIGH 52WK LOH EX. DATE 10 355 12-15 12-15 100 355 12-15 12-15 12-15 With Treasury Bond futures at 117-15, Put open interest for the 117 down to the 112 strike prices totals 60,60--i contracts. Now lets look at the open interest for the same strikes on the September Treasury Bond Calls. 57 US TREASURY BO"ND PRICES IR H•lili(t1 111,w•1:.i1u1:s ~ ~ USPC121 HIGH LOIi OPEN UOLU11E OPEN INT. TICK UOL. TICK Til1E BID BID SIZE ASK ASK SIZE 521-JK HIGH 5211K LOIi EX. DATE 39

3? 3? 6003 11610 ••••• 0 20 19 19 6426 11199 10 10 10 4188 10223 4 4 4 2965 6399 2.0000 +0.0000 1.0000 +0.0000 10 1 1 2 2 8 400 400 2435 6030 36 12-15 12-15 12-15 12-15 11106 December 11023 March 11008 June 10923 September 10907 The progression from high to low prices is normal for T-Bonds. US TREASURY TEN YEAR NOTE PRJCES 2 355 355 September 12-15 The Call open interest for the 118-123 strike prices totals only 45861, showing that the Put sellers, usually the commercial interests in T-Bonds, are still short interest rates by being short Puts (in effect, long Bonds) by a substantial margin over noncommercial interests (generally the public). Since this is the normal condition I would expect for the T-Bonds, I have only to ascertain that T-Notes are in a similar condition. An inspection of T-Note open interest shows 38,220 Calls and 48,176 Puts There is obviously a much more balanced open interest condition in T-Notes than m T-Bonds. This

1s probablv because the public does not usually get involved in T-Notes. Nevertheless, the T-Note open interest is in line with what 1 would expect it to be The short Put open interest among the commercials is greater than the short open interest in Calls. ~tember pecember 10824 March 10802 ! June 10723 I September 10711 10811 ~ I The progression from high to lov,; prices is normal for I-Notes. Based upon any market moving news, a nonnal progression of T-Bond and T-Note prices, and a nonnal condition in open interest, I would be inclined to take this trade. The only remaining factor is an entry based upon an appropriate chart signal My chart entry signals will be discussed m a later chapter. I would now be able to proceed with the trade based upon the factor of open interest provided everything else was correct. To repeat, I want a normal progression in IBond and I-Note prices from high front months to lower back months because this trade involves an interest rate

spread. Lets now look to see if there is any backwardation in my supposed NOB spread. 58 I 59 Chapter 6 Filtering Process: Time Window Seasonal spreads, no matter how they are derived, will pass through an optimal window in time when an entry 1s "best" made. There will also be an optimal ·best" time for exit. These time windows were and arc discovered by a process of iteration and averaging. Today, with the aid of high speed computers, they are fairly precise in their optimization. Yet the various services that provide seasonal spread trades will generally agree that blindly trading seasonal ,vindows is not the best way to enter seasonal spread trades. I have seen seasonal windows open in excess of one month on either side of the optimized best window. It is because of this variance, that some sort of technical mdicator is needed as a filter to enhance the timing of entry and exit One needs to see when prices are actually creating the conditions for entry. Lets

view some actual seasonal spread trades in light of the optimized seasonal windows and compare those seasonal windows with the period of time in which the best actual entry could have been made. First lets look at a May Soybean/Wheat spread to be entered on about the third Monday in February. This trade is based on the fact that Soybeans tend to be flat to slightly up in the Spring, while Wheat prices are beginning to be depressed by the commercials going into the Wheat harvest. This trade generally works 13 out of 15 years. 60 61 LCJ/LCQ 11.600 SK/WK 242.50 240.00 237.50 235.00 232.50 . d 23000 nible optimize 0 227 . 50 225 . 00 exit date. 222.50 220.00 217.50 215.00 212 .50 210.00 207.50 205.00 202.50 200.00 197.50 195.00 192.50 190.00 1B7.50 185 00 I I ,,",,, " 11, II,, 1, " 1,111,, 11 l11l11I 11111 Ill 111111 Ill 111111I1111,1111111111111111 I 11" ,, " . " "" Jo.n Feb No.r Apr llay Optimized 9.6008 9.2000 B.8008 B.4008

8.0908 7.6000 7.2008 6.B008 6.1008 6.0000 5.6000 5.2000 1.B000 4.4000 1.0000 3.6000 3.2000 2.B000 2.1000 li11,l1,1l11i111111l111ll111111l1111ll1 l11l1l11lil111l1ilillll11ll1ill11i111llll11l1111111 Jo.n Feb llar Apr • Can you see that the optimized entry date for this trade was about as good as it gets? It harmonized perfectly with a chart pattern signal I will show you later. But look at the terrible exit this trade would have made if you were to follow the trade until the optimized completion date. Also note the position of the exit had you liquidated the trade based upon a chart pattern The difference between the two exit dates was 18 points or $900. The chart pattern exit was good for a total gross gain on the trade of $1,525. The gross gain using the optimized exit was $62500 Taking the trade in the period shown above was obviously not typical of the best exit dates found in other years. I have proven repeatedly that it is much better to exit via chart patterns than on

optimized dates. Next I want to show you a chart in which a great improvement over the optimized entry date could have been made. 62 11.288 10.808 10.400 10.008 Pattern entry date The chart above shows the seasonal spread long April Live Cattle, short August Live Cattle. Years of testing has shown this spread to be 93% accurate It is generally profitable 14 out of 15 years Optimizing the entry date would have this trade entered on about the third Friday in March. Did you notice that the optimized exit date could not have been more perfect? It hit the exact high of the very brief widening of the spread In fact, this trade is an excellent example of how seasonality works. For most of the year, August Cattle gained on April Cattle. Research into seasonality through numerous computer iterations spotted that approximate window in time when April Cattle either rose in price more than August Cattle or decreased in price at a slower rate. In this particular instance, Live Cattle prices for

both contracts were in steep decline at the very inception of the optimized window in time. By March 31, both contracts had made an abrupt tum and moved up sharply, ending the decline in Cattle prices. The chart pattern entry caught this turn around in Live Cattle prices one day after the tum. However, the optimized exit date proved to be far superior to the pattern exit date. Lets look at a few more charts to see what we can learn about seasonal spreads. Then, if you havent already figured it out, Ill show you my astoundingly simple pattern recognition entry technique. LCV/FCK EDM/EDZ Optimized 1 Optimi:ied exit date IIIIII iII1111 I IIMar I II I I Ii IIIII 11 II I 11 II 111,, 11 ii 11 I III I III III, 111~nI11 IIIii .6500 .6000 .5500 .5000 .4500 .4000 .3500 .3000 .2500 .2000 .1500 .1000 .0500 .0000 -0.0500 -0.1000 -0.1500 -0.2000 -0.2500 -0.3000 -0.3500 -0.4000 -0.1500 -0.5000 111111 1 -r ~y 67.600 67.200 66.800 66.400 66.000 65.600 65.200 61.800 64.100 64.000

63.600 63.200 62.800 62.100 62.000 61.600 61.200 60.800 60.100 60.000 53.600 59.200 58.800 58.100 The seasonal spread shown above involves long June Eurodollars/short December Eurodollars. This trade is entered approximately the end of the first week in March and exited the last week in April. It has been profitable, on average, 91 % of the time. Did you notice that if you had entered and exited this trade on the optimized dates, you would have lost money? However, using chart pattern entry signals, there never would have been an entrv because there never was an entry signal within the time window I would use for any spread trade, i.e, ten trading days before until ten trading days after the optimized entry date. 1,." I, 111 , 1, " 11 1, 11,I I, 11, 11 II Ill I11111111111il 111 Ill, 1l1111111 I1111111111, 1111111111111111111111111111hlllll11i 111111111 Feb Mar Apr May Jun Jul The spread pictured above involves long October Live Cattle and short May Feeder Cattle. The

optimized entry date is about the second Friday in March The optimized exit date is around the last Friday in April Obviously the trade was a loser in the year shown, although this trade is profitable 93% of the time over a 15 year period. Here we see a perfect example of a generally reliable trade losing because of fundamental conditions. In the previous year, there was a shortage of Feeder Cattle Not many cattle had been brought to the feed pens. Feed lots did not have a sufficient number of feeders to sell to the slaughter houses. Simultaneously, there were plenty of Cattle still out on the farms and ranches. Therefore, the seasonal spread could only have worked in reverse, i.e non-seasonally Understanding how to trade this spread wasbased on knowledge of the fundamentals. Can you see that its important to have such fundamental knowledge? There is no pattern entry signal at or on either side of the entry date for taking the trade on a seasonal basis. 64 65- l was a wonderful

chart pattern entry signa In fact, b~se d o~ the fundame~tals, there d. sprea nal seaso al t opposite of the norm f?r reve rsmg th1 s trade and domg the exac in Chapter 7. rly prope done trade same I II show you this LCV/FCK ~ Optimized entry date I ~J , I,." I 1"·,,I" "", ,"·"" I, I 1, ,I Ill Feb Mar 67.60 0 67.20 0 66.80 0 66.40 0 66.00 0 6S.60 0 65.20 0 64.80 0 64.40 0 64.00 0 63.60 0 63.20 0 62.80 0 62.40 0 62.00 0 61.60 0 61.20 0 60.80 0 60.40 0 60.00 0 59.60 0 59.20 0 SB.80 0 58.40 0 1ll111111l111111111!1111111l1 11rll111.II 1:11, 11 II !!111!,1il!li!:1111111 11i1111il111iillill111 Jul Jun Apr May ow open ed up changed and a nonnal seasonal sprea d wind It is long May . page trade on the previous nght on schedule. It 1s the reverse of the show s wher e e abov chart Live Cattle. The ~eed er Cattl e/sho rt October (or August) ized exit optim the and , May in .t happ ened The optimized entry is the first Monday ts the seco nd

Friday in May. ?- bit later, the situati on exit signals corresponding almost exactly T~is trade gave virtually perfect entry and with char t patte rn signals. of the spread. You see it as LCV/FCK The abov e chart gives an upside down view · show the spread FCK /LCV . Norm ally, one would graph the futures to same charts and perh aps a few other s to I sup~ ose its about time to show you these ls. expl am my sllilple entry and exit signa 66 Chapter 7 s Filtering Process: Entry and Exi t Sig nal ng are about the same as my entry and exit My entry and exit signals for spread tradi difference is that in the case of sprea ds signals for outright futures trades The main s instead of a bar char t show ing opens, Im looking at a line chart of connected close highs, lows, and closes. The Law of Charts to understand that there is an invisible law Over many years of trading, I have come as either a bar or line chart. All bar or that governs anything that can be depicted They all make form

ation s that I call line charts have certain things in common. "Tra ding Rang es." (See Appe ndix A for "l-2- 3s," "Ledges," "Ros s Hooks," and charts.) details on these fonnations when using bar The char t can be of egg production r readings in Paco ima, or typic al mon by Leghorn hens in August, average gas mete past two deca des. gage loans in Eastern Pennsylvania for the It does nt seem to matter what is being charted. ron a bar chart than on a line chart. Neve These formations are more easily spotted of t char is what they look like on a line theless, they exist on all charts. Here spreads: 67 r will enter on the upside or downside breakout of I will enter on a breakout of the hiii;h or low point of a ledge when all filters are ri&f,t for the trade. the #2 point of a 1-2-3 fonnation if all other filters are right for the trade, SK/WK ~ I Now lets look at the charts we previously viewed. After that, well look at additional

charts so you can see more of how everything works together The entire topping fonnation is nothing more than a large Trading Range. 3 A Ross Hook (Rh) is formed at the point made by the f1rst and all subsequent price con-ections followine the breakout of a #2 point or the fllst co1Tection subsequent to the breakout of a Ledge or a Trading Range. The chart patterns I use and my entry and exit signals are shown above and below. There is really no difference between them. An entry signal to go short is the same as an exit signal for a long position. An entry signal to go long is the same as an exit signal for a short position. ns = natural sup()on nr = natural tt11rtance Trading R a n g e ~ / Ledge-~ bottom bott()ffl I will exit a long trade on a tako.out of a natural sup()Ort point. I Will e:r:lt a lllort trade upon a take-oat of a natural resistance point. ~ I coITesponds exactly to the breakout of a Ross Hook. Ent,y could also have been made at a breakout of the #2

point. 212.50 218.00 237.50 235.00 232.50 Horrible optimized 230.00 exit date. 227.50 225.00 222.50 220.00 217.50 215.00 212.50 210.00 287.50 205.00 202.50 200.00 197.50 195.00 192.50 190 .00 187.50 185.00 ,,.,,,,,,11,,11111111 11111ll1111l1il111lllllllilll1lllllll111li11ll111l1l11l1ll,illll1,,,,,,,,,, Jan Feb Apr Mar May Here we see a 1-2-3 low coming during the window of time in which the trade might have been entered. A breakout of the #2 point is a satisfactory chart pattern entry signal. If the breakout of the 1-2-3 is not taken, then a breakout of the Ross Hook (Rh) also gave an excellent entry signal and was coincident with the optimized entry date. The chart pattern exit signal of natural support was far superior to the optimized entry signal and factored into accoW1t the fact that the spread was no longer working. . Did you notice that prior to the optimized exit date, there was a 1-2-3 high followed by a series of Ross Hooks, and that the entire topping formation

was a highly volaWe Trading Range? There was a ledge forming at the optimized exit date. 3 68 69 LCJILCQ EDM/EDZ 11.600 11.200 10.800 10.400 10.000 9.6000 9.2000 8.8000 8.4000 8.0000 7.6000 7.2000 6.8000 6.4000 6.0000 5.&000 5.2000 4.8000 4.4000 4.0000 3.&000 3.2000 2.8000 2.4000 Pattern ently date Optimized enay date I Il I, I1, IlIIIIII111111 II, IIIIIII, 11, , ,, , ,,,,II , ,,, , 111 II1111,, ii 11 11, I11 i11,, I 11 1I11 Jan Feb Mar I11111 Apr This trade presented a superior entry signal at a breakout of the #2 point of the 1-2-3 low. Even an entry at a breakout of Rh would have been acceptable However, the natural support exit signal was much worse than the optimized exit signal. The exit based on the chart pattern signal would have resulted in a breakeven trade with an entry base upon a breakout of the #2 point, and a loss with an entry based upon a breakout of the Rh. In trading you have to take the good with the bad There is no perfect way to trade.

Later, when we get into "Contrarian Trading," youll see that you could have reversed this spread and profited nicely by doing so. Do you see that the pattern exit date is really the taking out of a #2 point of a 1-2-3 high? Reversing the spread at the pattern exit point would have resulted in an excellent long term trade because the spread continued down beyond what is shown on the chart. 70 ,E,500 .&0110 Optimized enay date .5508 Optimized ,5000 .4500 .4008 .3S08 .3008 .2S08 .2000 .1500 .1000 .0500 .0008 -0.0500 -0.1000 -0.1508 -0.2008 -0.ZS08 -0.3000 -0.3500 -0.4000 11111111 I1111 I 1,Mar I I 11 I ii III,II I I , 1I :I I II I Apr I/ II iillayii II,1111 I I,I I IIILiiJunII1111 l ii I -0.4508 -0.5008 I Entry via a chart pattern signal could not have been made on this seasonal spread. The trade was to go long the spread, but an entry signal never appeared within the allotted time window. The lack of a pattern entry signal filtered out what would have

been a losing trade had entry been made solely on optimized dates. Do you realize that during most of the time between optimized dates the spread was in a Trading Range? Reversing the spread as prices took out the low of that Trading Range would have yielded fat profits. When you notice that for fundamental reasons a spread is obviously not working, the best thing you can do is to reverse it and go the other way. That is what I call "Reality Trading," or the "Thinking Mans Way to Trade." Later on in the course we will delve more deeply into this kind of trading. 71 . FCK/LCV FCKILCV E:rit on breakout ,. 1 , ,,, ,,, ,, 1,,, 1111l11ll11111l1111,l,,lll,1l1111111l,1111lll11,1111il1111Jlliill1111ll111111l111J11111ill1l111!l1 . , , 11 , , 1111 II 11111111111I I 11111, 1l1111111 I111 II Ill 11 Feb Mar Apr May ill! I111111 Ill III1111 II 111111I111111111I11111111 I Jun Mar Apr May un u Jul Do you remember this trade? Based solely on optimized

entry dates, this trade would have been a big loser. This is the one where the fundamentals in Live Cattle versus Feeder Cattle should have had us going counter-seasonally. What Ive done here is to show you how Qie chart would have looked if it had been graphed as FCK/LCV instead of LCV/FCK. You can see that a breakout of the #2 point, or even a breakout of the first or second Rh, would have resulted in a profitable trade. The natural support exit worked just fine and came 17 trading days before the optimized exit date on the last Friday in April. Later on, the FCK/LCV trade worked again, only this time it was seasonally correct. We showed it upside down in the previous chapter. On the next page, you will see it right side up. 72 Feb This is the trade that could have been picked almost perfectly by using optimized dates. The optimized dates in this case did a little better on both the entry and the exit signals than did the chart pattern trades. It is not untypical for a seasonal

trade to have entry and exit dates quite close to one another. In this case, the seasonally optimized days were only 10 trading days apart. Before the advent of the computer, it was virtually impossible to so closely pinpoint seasonal spreads. Seasonal spread profitability windows were much less specific. When I learned these trades many years ago, the best I could do was to memorize the general time period in which the trade usually worked. These time frames typically covered at least a month and sometimes more I had no way in the world to slice time windows as precisely as can be done by computer. 73 . I believe that now is the time to show you some additional seasonal spreads. Once again, the computer has done something that would have been extremely difficult to do in years past. Some good examples of computer generated spreads are found in the currencies. How in the world would a person go about manually detecting a spread such as long Japanese Yen and short British Pound?

Such spreads are difficult to think of as seasonal Is there really a time of the year when J- Yen goes up against B-Pound? Apparently there is. We begin the next chapter with such a trade and others like it Chapter 8 If at this point in the book you are not thoroughly familiar with my pattern entry signals, then I suggest you go back to Chapters 6 and 7, and review the charts in them. You might also take a look at Appendix A for additional help. From here on were going to move right along with these seasonal trades. Well also be introducing some other uses of spreads along with examples in subsequent chapters. Seasonal Spread Examples Vie begin with a JYU/BPU spread. Entry is made on a breakout of the #2 point r~f~1 )~ } 1 ) IAJ A - , Vv./ ~ ns J c; 13 / (v, / / I< Optimized . entry date 1s same as #1 point. xit is on breakout of ns. \ ~ Optimized exit date -0.3300 -0.3108 -0.3500 -0.3600 -0.3708 -0.3800 -0.3900 -0.4000 -0.4108 -0.4200 -0.-1300 -0.4400

-0.4500 -0.4600 -0.4700 -0.4800 -0.4900 -0.5000 -0.5108 -0.5200 -0.5300 -0.5400 -0.5508 -0.5600 llar 74 Apr . May ·············illll1111l11lll11i11ll11l111111 Jun Jul 75. We begin with a JYU/BPU spread. Enny is made on a breakout of the #2 I3 Optimized] entry date is same as#l point. . . Apr ofns. Optimized exit date -0.3300 -0.3400 -0.3500 -0.3600 -0.3700 -0.3800 -0.3900 -0.4000 -0.4100 -0.4200 -0.4300 -0.4400 -0.4500 -0.4600 -0.4700 -0.4800 -0.1900 -0.5000 -0.5100 -0.5200 -0.5300 -0.5400 -0.5500 -0.5600 Apparently, B-Pound did not want to go down against the D-Mark as well. This can be seen in the seasonal spread chart that follows. By the way, 1-2-3 formations can form within a Trading Range. I purposely did not mark every formation on these charts so that you could learn by marking them off yourself. It might be advantageous for you to be doing that as we go along through the course DMU/BPU No entry signal within 2 Wl!eks of optimized entzy date

. , The first thing to notice is that, although this spread usually is profitable 12 out of 15 years, overall this doesnt seem to be one of the major winning years. The optimized entry was a little better than the pattern entry, but after much struggling, had you liquidated the trade on the optimized exit date, a very small profit was available. The same situation holds true for the pattern entry and exit dates. Virtually the same small profit was available. I show you this because I dont want to delude you into thinking that you will always win when trading seasonal spreads. The fundamentals for this trade are based on the tendency for B-Pound to move lower against other currencies beginning the fourth week in May and continuing until the fourth week in June. A spread trade in September currencies taken in May would be tenuous indeed. The back months of the currencies trade very thinly and truly lack liquidity. Spreads between national currencies were not common until

recently. Now there is sufficient data to be able to compute a reliability factor for such trades 76 .Mar ""iii,r" -0.8400 -0,11440 -0.8480 Optimized exit date -0.8520 -0.8560 -0.8600 -0.8640 -0.8680 -0.8?20 -0.8760 -0.B800 -0.8840 -0.8880 Note: -0.8920 1-2-3 and -0.8960 Ross Hook -0.9000 -0.9040 came more -0.9080 thanlweeks -0.9120 after the -0.9160 -0.9200 optimized -0.9240 entry date. -0.9280 -0.9320 Jul Jun ·11ay . ,,, ,,,,,,,,,11ll1111lillll11,11l111l111l11 The reason I wanted to show you this trade is that my simple chart entry signals would have kept you out of the trade, whereas the entry from the optimized time window would have resulted in a breakeven or minimally profitable trade. The available profit was hardly worth the accompanying emotional and mental stress that were also available. The lack of chart signals during the two-week window prior to the optimized entry date may seem to have given a hint that all might not be well with the seasonality

factor of this spread. However, one cannot give too much emphasis to the chart patterns prior to and subsequent to optimized entry dates unless the patterns signal that the move is coming early or late and that entry is at hand. Seasonal spread trades do not need periods of accumulation or distributio? to work. 77 · They also do not need a top or bottom following a trend. They can occur suddenly and counter-trend to the previous spread action. What you are trading with seasonal spreads is the proven tendency for them to behave in a certain manner during a certain time period. The following long August Soymeal/short August Bean Oil was an unusual trade in that the optimized entry date and the optimized exit date both fell within my own, in this case larger, window in time. The optimized entry date was the second Thursday in June The optimized exit date was the third Thursday in June In other words, the entire trade was to take place within a single week. If youll remember, my own

entry window is from ten trading days prior to the optimized entry date until ten trading days after the optimized entry date. That means the window in time I would be looking at would span in time from the last Thursday in May through the fourth Thursday in June. Lets look at that trade now SMQ/BOQ The first possible entcy date for my time window. Optimized exit date Last possible entcy date for my time window. I " . , , "" "" ,,, ,,, 1111111,11,,, ,,1,1111dl II d1 II 11111111 Iii 1111 Apr May Jun Jul -68.000 -70.000 -72.000 -74.000 -76.000 -78.000 -80.000 -82.000 -84.000 -B6.000 -B8.000 -90.000 -9Z.000 -94.000 -96.000 -98.000 -100.00 -102.00 -104.00 -106.00 -108.00 -110.00 -112.00 -114.00 Perhaps youre wondering whether or not I miss a lot of trades. The answer is yes, I do. I want trades to be as near a sure thing as I can get them to be I do not consider the small profit that was made on this trade to have been worth the effort My entry signals

are part of my filtering process, and I want them to keep me out of trades that carry more than an ordinary risk of not working. Taking every trade that comes along just because it is there has never worked for me. I want to be as selective as I possibly can Talcing every trade just because it exists or has proven profitable a high percentage of the time is, in my opinion, a form of overtrading Far too many traders are overtraders. One sign of a mature trader is that he is able to judge which trades are worth taking and which are not. The mature trader typically has methods for filtering his trades. He seldom chases a trade Computerization of futures prices into databases has made possible many seasonal spread trades that in the past were not readily seen or even known. Some of these trades may eventually prove to have been solely a matter of time and chance. Sometimes it is difficult to see any known fundamental rationale for the trade. It is therefore all the more important to filter

these trades by any practical means. Two days after the optimized close of SMQ/BOQ another seasonal trade window was about to begin. This trade was BON/SMN, long July Oil, short July Meal Youll find it on the next page. The trade taken on the optimized dates made a small profit. No entry signal of mine occurred that would have gotten me into this trade. 78 79. Note: A Ross Hook is always a potential #1 point. Rhl BON/SlVIN 11.408 11.208 Exit on breakout 11.000 10.800 10.608 10.400 10.208 10.000 might be helpful for you to Before continuing wi~ our discu~sion of this trade, it is for you to use for that mark and label the vanou s format10ns you see. This page purpose. BON/Sl1N 3 Exit on breakou t identical with breakou t day. Optimized exit date resulted in small loss. 1ll11 11111111 :1111l1111111il111 illl111:111111111l ,,1l1i1111,1,,11lll,1,lill1il111l I Julll111111, . """"""""ll,, Jun May Apr Mar Feb 11.400 11.200 11.000 10.800

10.600 10.400 10.200 10,000 9.8000 9.E000 9.1000 9.2000 9.0000 B.B000 B.f,000 8.4000 8.2000 8.0000 7.8000 7.E,000 7.4000 7.2000 7.0000 f>.B000 optimized entry date? H W11at is the fonnat ion called that corres ponds to the support exit? What wo:~ natural the d create would you label the fonnati on that the one next to the last chart, the on g formin 1s you call the very last formation that On the following Note: chart? this on s Ledge any see arrow on the chart? Do you ed by 1-2-3 high or vicechart, con~ecutive 1-2-? formations, e.g 1-2-3 low follow or a Trading Range. Every versa, md1c~te conges tion m the form of either a Ledge is a Ross Hook. point #1 Ross Hook 1s a potential #l pomt, but not every 80 ~ I 3?? 2 9.8000 9,f,000 9.1000 9.2000 9.0000 B.B000 8,f,000 8.4000 8.2000 8.0000 7.8000 7.f>008 I Rh 7.4000 I 7.2000 7.0000 ! 6.B000 i """" "",, Feb I1111111 . !l1 IIii ,,,111111l11 11111il1111 I111ili1lll1 11," I111 .

11111111 "" 111 i I 11 ,111l1li 11 ii 1111111 Jul Jun May Apr Mar were identical. Howev er, The optimi zed entry date and the chart pattern entry date zed exit. Again, the optioptimi the to results r superio the chart pattern exit gave far mized dates gave a very brief window of time for this trade. days, from the third Friday in The optimi zed dates for being both in and out were 10 June throug h the fifth Thursday d for Soybe an Oil This trade finds its fundamental rationale in the greater deman probability that 80% an has It er Summ over Soybe an Meal in late Spring and early It might interyears. 15 of out 12 works ly typical it will work in any given year. It dates, it averzed optimi the within works trade the est you to know that in the years the average loss is $170. ages $732.5 0 per contract In the years in which it loses, 24 points. Howev er, this Based on my pattern entry and exit dates, the trade made contracts involved do not is an "equit y" trade. An

equity trade is one in which the value of $6 and Soy tick a have identic al tick values. In this case, Bean Oil has this sort of trade. Its a Meal has a tick value of $10. Ill show you how to handle bit tricky. 81 Computing Spread Equity differing The problem is that we are confronted with two futures contacts having as simloss or profit our e price values per tick. Because of that, we cannot calculat this for ion calculat adjusted an make to ply the difference between prices. We have . example an as trade 1.N BON/Sl the kind of trade. We can use spread when For the trade on the previous page, lets assume that we entered the The spread 1765. of price a at was Meal July and 2730 of price July Oil was at a of differpoints differential is 965. In other words, we entered the spread at 965 $6 and at moves Oil ence. How do we value those 965 points on an equity basis? rick Meal at $10 per tial would reIf the prices of each contract were to fall by 50 ticks, the price differen To find

out, equity? trade the to happen would main the same 965 points, but what in the futures ing underly two the of each for value we have to compute an equity spread. Calculation 2730 X 6.00=16,380 1765 X 10.00=]7,650 At entry, the equity value for the trade 1s 16,380 - 17,650 = -1270 would have: If prices moved down 50 points on each of the underlying futures, we 2680 X 6.00=16,080 1715 X 10.00=17,150 Our equity is The equity value for the traue would be 16,080 - 17,150 = -1,070. money. making less negative and we are have: If prices moved up 50 points on each of the underlying futures, we would 2780x 600=16,680 1815 X 10 00=18,150 be losing on The equity value for the trade is 16,680, - 18,150 = -1,470. We would entered. first we when than this trade because we now would be more negative equity situation. A brief examination of what is happening will further explain the 82 at $ IO is If both Oil and Meal are going down the same number of price ticks, Meal Meal, short ~d Oil long is

spread the going down faster than Oil at $6.00 Since profits. making are we and Meal than amount Oil is moving down a lesser dollar ticks, Meal When both Oil and Meal are going up at the same rate of speed in price spread is the at $10 is going up a greater dollar amount than Oil at $6.00 Since and we Meal than long Oil and short Meal, Oil is moving up less distance in dollars are losing money on the spread. problem For those with sufficiently deep pockets, there is a solution to the equity equate to is solution The trade. the in equity the when one doesnt want to compute a: tick per much as (3/5) 60% is Oil Bean Since basis. the position on a fractional woula s contract 011 five sold, ts contrac Meal three every for Meal, it is possible that two extra 01] be purchased. This renders a perfectly even spread, provided that the er of the contracts can be purchased at the same price as those for the remamd in on all legging require spread. Obviously, placing the trade in this fashion

would be enwould Oil p~ce what contracts. Why Because there is no way to know at m the only d mtereste 1s trade spread a tered via a spread trade The broker who fills The used. futures the of price actual the in price differential of the spread and not use may H~ po~ts. 965 d specifie the at on spread broker is going to try to put that Job. the lish accomp to prices Meal and Oil of tions any of a number of combina ove~ the There are many exchange recognized equity trades that have been proven Silver and Gold years. The Crush Spread and the Crack Spread are two of these spreads. l seasona for ts also have proven track records as the underlying contrac an equity baWith that in mind lets look at a spread between Gold and Silver. On $50 per full at moves Silver t. contrac sis I use two Sil~er contracts for every Gold $100. at point. A full point in Gold is valued er Silver. The spread we will be tracking is long December Gold and short Decemb you show als~ Ill ?asis. one one-toa on looks

chart spread the Ill show you how normally 1s how the same chart looks on a two-silver-to-one-gold basis. The trade around the entered around the second Monday in June, with an optimized exit date last Wednesday in June. 83. GCZ/SIZ Break.below natural supp art Optimized exit dat Breakout of Trading Range high -75.000 -82.500 -90.000 -97.500 -105.00 -112.50 -120.00 -127.50 -135.00 -142.50 -150.00 -157.50 -165.00 -172.50 -180.00 -187.50 -195.00 -202.50 -210.00 -217 .50 -225.00 -232.50 -240.00 -247.50 •. ,, ····;,;·;· 1,l,1,,,1,,l1,l1,l1,1,11,,,,,,,1,l1, 111!111,1111,111il,,!1,l11i1l11 Ma Jun Some seasonal spreads are based upon the fundamental relationship between an old crop and a new crop. Some Live Cattle seasonal spreads are based upon a similar condition. The fundamentals underlying Live Cattle spreads have to do with the gestation period of cows and when they drop their calves, and the availability of feed at certain times of the year. Also involved are the

times of year when farmers typically bring cattle to the feed lots. In the following seasonal spread, we purchase October Live Cattle and sell the following years February Live Cattle The spread is put on late in the fourth week of June. This is to take advantage of the seasonal tendency for October Live Cattle to gain on the following February. This old time trade usually lasts for several weeks. The optimized exit date is at the end of the first week in August. LCV/LCG -0.1500 -0.3000 -0.4500 -0.6000 -0,7500 -0.9000 -1.0500 -1.2000 -1.3500 -1.5000 1 · 6598 The optimized entty date-1.8000 and the pattern entry -1. 9500 are identical. -2 .1000 -2.2500 -2.4000 -2.5500 -2.7000 -2.8500 -3.0000 -3.1500 -3.3000 -3.4500 -3.&000 At the time this chart was made, the trade was still continuing to be profitable. Jul GCZl2SIZ Do you notice the difference between this chart and the one above? The •difference is in the price . • • scale on the riwl.t D" , In this case, I h ave

mutliplied the spread to mdicate 2 short Silver contracts for each long Gold. •. 11 •• 111,,1111 • A r -540.00 -555.00 -570.00 -585.00 -600.00 -615.00 -630.00 -645.00 -660.00 -675.00 -690,00 -705.00 -720.00 -735.00 -750.00 -765.00 -780.00 -795.00 -810.00 -825.00 -840.00 -B55.00 -870.00 -885.00 I111 II I II111,I ,, , 11111 11111111i111il1i, Ii1111ll11111111l1111lllli111111 ii Iii i1I ,I I1111111 Ar Ma Jun It will be interesting to see which exit technique garners the best results. 1,l,1,,,1,lll,.1,,!1,1,1,,,,,1,,,1,l1,,1,1,,l1,,,,1,1,,,,,l,,l1,l11l1l11 a Jun 84 Jul Jul 85 A Word about Optimized Exit Dates Some optimized exit dates on seasonal trades occur after First Notice day. In fact, some of the dates come during the delivery period. In my own trading, I will be out of any spread trade within a day or two on either side of First Notice day. If past price action subsequent to First Notice day is what has caused the spread to be profitable, then I am not

interested in such price action. Many seasonal spreads occur in already thin and illiquid markets. I do not want to jeopardize my capital by being in a spread trade after First Notice day when even the most liquid of contracts become very thin and illiquid. Also on the topic of optimized exit dates, when they come before I get an exit signal, and if the spread is moving my way, I will stay with my natural support, natural resistance exit signals. Time and experience have proven these to be superior overall to optimized exit dates Exit from any trade, including seasonal spread trades, always involves a certain amount of judgment on the part of the trader. I would not find it unreasonable to see a trader using a money stop, a percentage stop, etc. At least some sort of catastrophic stop should always be used For years I have said and written that no one can tell you where to place your stop. In the case of seasonal spreads, your stop can be mental, or resting in the market as a spread

order inverse to the trade in which you hold a position, based on the number of points in the spread differential. Premium refers to the amount of positive differential between the contracts to be spread. If the differential is a positive number, ie: the price of the ~uy side is greater than the price of the sell side, then the prem1um 1s to the QYY side. If the contracts to be sold are greater in price than the contracts to be purchased, then the premium is to the sell side. It is acceptable to tag the premium to the name of the commodity by saying "premium to the Wheat," or "premium to the Gold." Heres an example: With December Com at 2.95 a bushel and December Wheat at 475 a bushel, if you wanted to buy Com and sell Wheat, the price differential for the December contracts is a negative 1.80 a bushel I would place the order like this: Buy one December Com contract and sell one December Wheat contract on a spread, one-dollar-eighty, premium to the sell side, or

premium to the Wheat. When putting on the trade one leg at a time, I place the entry order for both sides of the trade in the normal way I would enter any outright futures trade. For those of you who would like more information on ordering futures, options, and spreads, I refer you to the TOPS entry in Appendix C. A Dual Entry Trade Before ending this chapter, I want to show you a "dual entry" trade. This is a trade that gave more than one entry signal within the time window I allotted for the trade. Spread Order Entry Order entry for spread trades is a bit different from orders solely for entry into an outright futures trade. The trade took place via an SMQ/BOQ spread. Interestingly, the optimized entry and exit dates produced a sure-fire loser. The chart pattern entries produced two winners with the second winner being even better than the first. Both trades had entries ~thin the twenty-trading-day time window. When putting on the trade as a spread, here is the usual

way I enter the order: The following page contains all the details. Buy number of contracts, month and commodity, and sell number of contracts, month, and commodity, on a spread of number of points premium to the buy/sell side. 86 SMQI BOQ -625 -650 -675 -700 -725 -750. -775. -B80. -B25. -B50. -B75. -900. -925. -950. -975. Chapter 9 -1000 . -1025 . exit date F~b· 1111 11111il1111111ill1Aug ,11111il111l11illlli ,, . , i11,,,,,,,,,, . "ieip~""" , 11 ay Jul Jun -1B50 . -1075 . -1100 . -1125 . -1150 . -1175 . -1200 . · d enwith th e op t·1m1ze w was only five trading davs , in length , The optim ized • windo 1 try date f;:., upward move. dl mg on the very high of the Non-Seasonal Spreads Many times simple comm on sense Not all high probability spreads are seasonal. these through news stories and will unearth excellent spread trades. I usually find lture, currencies and intere st rates. by staying alert to what is happening in agricu trade sprea ding

the D-Ma rk and ng Simple observation has given me many a winni the S-Franc. ions in the NOB (Note s/Bon ds) l have also found many excellent spread situat s, you are long the NOB . When spread. When you are long Kotes and short Bond the NOB . A quick glanc e at the you are short Notes and long Bonds, you are short tant dignitary, an unexpected impor yield curve, a news story, a speech by some a governmental agency, or from t repor ical event or unexpected outcome of a statist can create remar kable trend ing in any change in governmental interest rate policies this spread. the LC/F C sprea d failed to In earlier chapters I showed you an instance in which at the same time there price in up Feeder Cattle were going work. Knowledge that would have been sufficient inforwas an oversupply of Live Cattle in the feed lots d. I also show ed you a year in sprea FC/LC al mation for the entry into a non-season the other grains. Long Whea t and which Wheat was in short supply compared with

non-seasonally. short any other grain position could have been taken 88 89 . A news story that South African gold miners are going to go out on strike is more than adequate to justify entry into a long Gold/short Silver spread. If Mexican silver miners are rumored to be going on strike, you could use reverse logic for the spread. Lets look at some non-seasonal spreads that could have been taken based simply on common sense and a bit of knowledge of what was going on in the world at the time they could have been entered. DMIBP In like manner, it should also have been just as clear that as soon as the crisis was over, if currency traders were satisfied that there would be no economic repercussions subsequent to the end of the crisis, there would be a good chance that the relationship between the D-Mark and the B-Pound would return to the proximity that was in effect before the crisis. -8450 -8475 -8500 -8525 -8550 -85751 -86001 -8625 -8650: -86751 -87001 -8725 -8750! -8775 -88001

-8825 -8850 -8875,· -8900 -8925 DM/BP WVfil i}j+EntryReturn to approximate ~3 -89501 -8975 [ Apr · May JI, 11II11II11 Ii ,ill II, II111 l Ii ll lIJul Aug original relationship~ 1 -9000 -90251 . ,, 11111 l I Jun Apr . Hay ii I I ii . ,,,,,I I IIIii I11 JI II, 1 III Jun 1 Jul 11 I I 1 1 I 11 ii II -8450 -8475 -8500 -8525 -8550 -8575 -8600 -8625 -8650 -8675 -8700 -8725 -8750 -8775 -8800 -8825 -8850 -8875 -8900 -8925 -8950 -8975 -9000 -9025 II Aug In June of 1995, there was a crisis in the British Government. The Prime Minister tendered his resignation, causing a vote in Parliament to have to be taken to see who would win as the next party leader. During this brief crisis, traders lost confidence in the British Pound due to uncertainty about the leadership in the United Kingdom. As far as I know, there was no seasonal trade that called for anyone to be long DMark and short British Pound at that time. Wouldnt common sense have dictated that you enter such a

spread? Yes, simple logic dictates that when there is a crisis in leadership in any country, that countrys currency is likely to take a hit. 90 Indeed, that is exactly what happened. No insider info1111ation was necessary to take advantage of this situation. The story was all over the news Simple understanding and observation were all that was needed to enter the spread and thereby profit from it. This sort of event is not uncommon In fact, it is becoming increasingly more common to encounter news events that can cause markets to make sharp moves. Taking advantage of such situations is a thinking persons way to trade 91 On the price page below, we can see that there is backwardation in Soybean Oil. R•Ji!f!O·JIIW~llilJil:fi GlBI Of course, at the time the crisis in the UK was over, you would have entered the spread BP/DM. Then it would have looked as you see in on the chart below BOSZ B06P BOf.H .2617 +.0000 ttltl . .2620 .2591 .2605 +.0000 L . .2608 .2590 .2591

•.0000 ftlH . .2595 •.01100 l. .2600 .2580 .2608 .2602 .2590 .2595 +.0000 1 . .260!1 .257!1 .258<1 .2588 13S7 2903 ~3 2001 730S 15433 2001 2378 11929 43 2001 1S478 %095 2S3 2001 362 4635 17 2001 111?8 5143 15 2901 .2620 2001 .260? 12S1 .2611 2001 .2615 1336 .2607 1326 .2605 2001 .2603 1336 .2598 2001 .2601! 1325 .25811 1301 .2598 1326 .2585 1301 .2608 9080 8975 8950 8925 8900 8875 8850 8825 8800 87751 8750) 8725 8780 8675 8650 8625 8600 3575; 85501 I B05U ,2624 +.0000 t . 1 .2625 .2598 BP/DM IR BOSU B05Q 119 .26~5 .2520 .2598 08-23-95 09-21-95 .2591 ,2608 .2590 10-23-95 .2605 .2565 .2605 .2565 12-20-95 .2600 .25?8 01-23-95 .2600 .2580 03-21-96 The Au0.1st contract BOSQ is priced at 2624 Each subsequent delivery month U, V, and are priced lower. It is only when you get to January of the following year B06F that you see prices in a later month higher than those in the previous month. This situation means that somebody is willing to

pay a premiwn in August to lock in a price for Bean Oil in case it goes higher in the future. Someone wants that Bean Oil now Z s5zsi 85001 8175, 01s0i 8125 Apr Mo.y ,, ,.,,,,1ill11l1lllill11,11l111l111l111il 1111/11 ~ ~I A~ Sometimes an event occurs that does very little for a spread relationship between two contracts. In an earlier chapter I mentioned that quite often backwardation is a sign that opportunity may be just around the comer. In the chart that follows, you will see that Soybean Oil encountered backwardation, but did little in the way of giving a profit opportunity. Lets look at that now 92 Backwardation is a situation that norrnally gives an alert that conditions are not normal in anv particular market Vhen I take note ofbackwardation, I immediately begin to look at a spread, long the front month and short a back month. I would expect the demand for the front month to cause it to move away from the back months, thereby causing a widening of the spread. However,

in the case of Bean Oil the widening was minimal. It was certainly not enough to have made a really great trade. The chart on the following page shows the spread. The page after that shows the August and December Bean Oil charts There is one other point of interest with this trade which I would like you to note. Although there was backwardation in Bean Oil, that backwardation occurred in a market whose prices were literally "all over the place." It is possible for that to happen. Even though someone urgently wanted the August Bean Oil and was willing to pay a premium to get it, during the period ofbackwardation the Bean Oil market overall moved strongly up and strongly down 93 · BOQ 28 .60( The spread moved from -2 to 33 for a total of35 points and $210 as of the last date shown. However, it took from mid-May until early August to do so 28 .10( 27 .60( BOQ/BOZ 27.10( 162 150 e 137 1 125 112 26.60( 0 1 26 .10( 100 e B7 1 75 0 62 50 37 25 12 25.60( 1 e e 25

.10( 24.60( 1 0 -12 -25 -37 1 0 1 -50 e -62 1 -75 e -87 1 OB 22 11 18 04 A 16 02 14 31 J M 26 12 J 26 A BOZ 28.350 -100. -112. -125. 27.850 27.350 26.850 This spread did not offer the smoothest of rides. There were a number of times where, unless you used a relatively large stop, you would have been stopped out. As a trader, you never win them all. Yet trades like this compel the trader to take them when the opportunity arises. It is only by looking back that you realize that this trade didnt tum out as well as might be expected. At its widest the spread was 40 points, i.e, $240 26. 350 25.850 25.350 24.850 24.350 94 95 Chapter 10 Fractional Spreads Fractional spreads may be created when a greater or lesser position is desired than what can be obtained through an outright futures position What is a Fractional Spread? All that rs necessary to create a fractional spread is to utilize exchange recognized spreads in futures that move radically

differently from one another or which have different minimum tick fluctuations. Fractional spreads can be seasonal or n0nseasonal They can also be derived from hedging Differing Tick Fluctuations It is possible to spread Crude Oil with a minimum tick fluctuation of $10 against Heating Oil or Unleaded Gas, which each have minimum tick fluctuations of $4.20 It is possible to spread Soybeans with a minimum tick fluctuation of$12.50 against Soybean Meal with a minimum tick fluctuation of $10, or Soybeans against Bean Oil with a minimum tick fluctuation of $6. Actually, weve already looked at these types of spread from the viewpoint of tracking equity. Now we want to look at them to see how we can take a fractional position rather than an outright l 00% futures position 96 97 lSM/lBO ns. Ill ,show you some e~l~s of fractional spreads having differing tick fluctuatio spread the watching begin to decided you rmd-July Let s assume. that m SM Soymeal /Soyod (SM/BO ), and that you had

infonnation that convinced you that about t confiden felt you that assume also Lets BO. t ~ a strongly up w?uld move 3 this move, but that y~u did not feel that you could create total equity by buying long trade, l fractiona a SM contract s and selling 5 BO. Instead ~ou decide to enter ticks 2 SM/1 BO. You would need to track this trade based on equity because SM l :fractiona a created have would you entry, of at $10 and BO ticks at $6. At the time trade. 13811 1275 1Z58 exit 12ZS 1280 1175 1150 1125 1100 1075 1858 18Z5 1008 975 950 9Z5 900 875 850 BZ5 --525. -550. -575, -680. -625, -650. -675. -?00. . SMIBo -?ZS. -?50 . -?75. -880. -825. -850. -875. -900. see 1111 I 1, 1111111111111, 11111111 1,IO " ii 1, " 1," 1, ,1,ll I i1l1,,, Ju 1 Jun Apr Hay Iii 11111 I11, Iii 775 758 725 Aug trade On a 1-to-l basis, the trade would move 135 points. On a 2-to-1 basis, the one this like trade a track would you y, previousl d mentione As points. moves 262 on an

equity basis in order to know bow much you are really making. -925. -950. -975. -1000. -1025. -1050. II 111l111111 1,I I I II II I 111 Jul I" II" I, ,1 I II,"""" . """"l1ay Jun Apr Iii, IIll 11 Iii" -1075. -1100. AIIIJ ce you The strong upward thrust in early July could have given you the confiden 1-to-1 a at plotted is above chart The contract. BO each for SM 2 enter ne~ded to rar~bo. The chart on the following page shows the same trade plotted at a 2-to-1 bo. 98 SM During the period of this trade from entry to exit, BO moved down by 8 ticks. x2 1290 of profit a , contracts SM moved up 129 ticks. Since the trade was long 2 $48 al addition An spread. the of portion = $2,580 would have been made on that of would have been made on the short Bean Oil portion of the spread, for a total have: we earlier did we as c $2,628. Looking at the arithmeti Exit Entry SM-1962 x 10.00=19620 SM-183 3 x 10.00=18330 BO-2723 x 6.00=16 338

B0-2731 x 6.00=16386 At exit the equity value is 3282 At entry the equity value is 1944 fuEntry equity value 3282 - Exit equity value 1944 = 1338 + 1290 from second tures contract = $2,628. 99. Radically Different Movements Ten Year Note futures often move much more slowly than do Long Bond futures. For some reason, the notes are less volatile than the bonds. I believe the greater volatility in the bonds is due to the greater number of speculators in the bonds. S&P r-- t[ht t1 There are similar situations in other markets but not necessarily for the same reasons. I111~~1 [I The New York Stock Exchange futures (YX) typically move 55%-65% as much as the S&P 500 (SP) futures, but it has nothing to do with volatility. In the case of the stock indices, the size of the base has a lot to do with how these indices move relative to one another. In one particular year, with a robust first-half year for the US stock markets, an outright futures position in the SP would have

required margin of $8,000. As time progressed, the market became more volatile, and the margin requirements rose to $12,000. The margin on a YX futures contract was considerably less Depending on your broker, margins ranged from $4,000 to $6,000 during the same period. It was obvious to many from the previous years events that the stock market was going to rise. In actuality, by mid-year it had risen more than many had expected It was also clear that investor money was going into the blue chip stocks more rapidly than into the broader market. Since the SP represents only 500 stocks versus YX which represents 1,500 stocks, it was clear that the narrower SP futures were going to rise faster than the broader YX futures. Now lets say you had wan~d to be long the US stock market futures, but you were unable or unwilling to put up the margin for an outright SP futures position. You could have made a fractional trade by purchasing long one S&P futures and selling short one YX futures. As

mentioned earlier, YX moves approximately 55%-65% of the amount that SP moves. That means you could have created a position that moved fractionally as much as the SP, and you could have done it using the much lower spread margins of SP/YX. Lets compare an outright futures position in the SP with a spread SP/YX. I r- ritrFr rrtf ;rttilr lft/ rr1/ ifr 1 t tf I 52?.5 519.5 511. 5 503.5 11 495.5 . ·tfrdhtrirrtitff 467.5 I 479.S l rr ff fl(~[ 19 471. 5 02 J 16 F 02 16 29 !1 12 A 26 10 l1 24 08 J The move in the outright S&P futures from the low shown on the chart to the highest point shown on the chart was 6,620 points or $165,500. However, for the averag: trader it would have taken considerable margm to hold the pos1t10n from January 2j until June 15. An outright futures position in YX would have also required mor~ margin than many traders are willing or able to put up, and would have resulted m a move of 3,285 points or $82,125. In this case, the move

by YX was far more disproportional to S&P than usual. It moved only 49.6% as much as SP Lets look a chart of the spread SP/YX. 100 ~,I r 535.5 101· Chapter 11 Conversions There are times when it becomes desirable to convert a spread trade into an outright futures trade. This is done by dropping one leg of the spread 1111111!111lll111111111111 ,. 111llllll11/1111,1l11,111hl11illll1l111l11lll1l111 ············· . ············ · ·······•· !tar Jun tlay Apr Jan Feb The spread moved 3,378 points or $84,450. It actually did better than an outright YX futures position and it did it at much less risk and with lower margins. The spread moved a bit more than 51% as much as did S&P. In what way was there less risk? Because the short YX position acted as a hedge against a sudden crash in S&P. There are a lot of S&P traders whose fortunes would have been "saved" had they been spread SP/YX in the debacle of October 1987. Do

you realize that it is not difficult to benefit from stock index futures? Are you aware that many traders, who normally cannot afford the risk entailed in trading the S&P 500 from a daily chart, could more easily trade it by employing a spread? It is commonly known when the broader market is faring better or worse than the blue chip S&P 500. Usually, that particular condition will last over a period of months 102 What are the conditions under which this might be done? Lets say that two sides of a spread had been moving sideways, the long futures sfde with a slightly upward bias and the short futures side with a slightly do~war d bias. be In such a case, the spread itself would be trending upward and hopefully 1t would trader. spread the to widening sufficiently to show a profit Then suppose that one or the other sides of the s~read began to tren~ in the futures. It might become desirable to abandon the spread m favor of the trending futures. The series of charts that follow

show just such a situation in the currencies. The trade revolves around being long September Swiss Francs and short September Japanese Yen. The two markets were drifting sidewa)s, but ~e ~wiss Franc prices were moving consistently away from Japanese Yen pnces, widenmg the spread between the two. 103. sru L 89. 35( nH l ~ Ir SFU/JYU -2025. J -2100. -2175. -2250. -2325. -2400.1 -2475. -2550. -2625. -2700. -2775. -2850. -2925. -3000. -3075. -3150. -3225. -3300. -3375. -3450. -3525. -3600. -3675. -3750. 11,ll1I 111l11il11111111ll11 . ,i1J1111111111li11J .Jun . " " 11ay . Apr . Mar Aug Ju I . , .Feii 88. 30( [f I" l1J 1Il I 111 11111 II 11111 11 111 I 11 I 1 87,251 1111tll 1 111 86. 201 85 .151 84. 101 11 rl ltlli1 83. 051 82. 00( t 28 12 05 26 19 12 05 19 17 10 03 26 24 31 14 07 Aug Jul Jun l1ay 80. 95( JYU I! 121.9• I Ifi. /1,i1,h•[p··,, 1 ,.1 1 11 I 119. 5! 1 tr11hh 117.11 t11 114. 71 II1rliit11,11I The

spread was steadily making money until July when it began to widen markedly. The question is, would it-have been better to stay in the spread, or to make a conversion to an outright futures position by dropping one side of the spread? I 112. 3: t[1H Lets look at the two futures contracts during the same period as the one shown on the spread chart above. 109. 9! l 107. SI 111 105. 1 102. 81 f 28 05 12 May 104 19 26 05 12 19 26 03 10 17 Jul Jun 10)- . 24 31 07 14 Aug Up until the first Friday in July, the spread had been making money as the Swiss Franc slowly but persistently gained by narrowing the spread between Swiss Franc and Japanese Yen prices. It did so by stubbornly moving sideways and slightly up, while the Japanese Yen began to gradually drift down. Do you see that, beginning the first Friday in July, the Japanese Yen broke downward out of its sideways pattern while the Swiss Franc continued to move sideways until the middle of the second

Thursday in August? On the second Wednesday in July, the spread line between Long November Soybeans and short September Soybeans reached bottom. From there, it began to move up, until the first Thursday in August when the spread line began to move up more sharply. Dropping the long Swiss Franc leg of the trade beginning with the first Friday in July would have resulted in substantially greater profits than holding on to the spread. Lets look at the numbers 212 200 187 17S 162 150 137 12S 112 100 87 75 62 On the first Friday in July, the SFU/JYU spread stood at negative 2969. By the last day shown on the spread chart, the spread bad narrowed to negative 2122 for a gain on the spread of847 points, or $10,587.50 Dropping the long Swiss Franc on the first Friday in July and retaining a short outright futures position in the Japanese Yen would have yielded a result as follows: The Japanese Yen closed at a price of 11652 on the first Friday in July. It closed at I 0269 on the second

Thursday in August. A short futures position in the Yen would have gained 1,383 points, or $17,287.50 50 1 0 1 0 1 0 1 0 0 1 0 1 0 1 37 25 0 12 0 -12 1 -25 0 -37 1 In Appendix A I show you my entry patterns for outright futures. You will be able to see why it would have been appropriate to drop the long Swiss Franc and be short the Japanese Yen. In this particular instance it worked out well to have dropped the long Swiss Franc, because the Japanese Yen moved down rapidly without a lot of chopping up and down and wild volatility. The transition from the spread to an outright futures position would have been relatively easy At times, this is not so Sometimes it is far better to stay with the spread than to give up the advantages of low margins, comparatively low volatility, and lower risk. 0 1 -75 0 . ,,,11, • 1,,,,,,,,,,,,,,,,,,, ,l,11,,,,,,,,,,,1,,,,, Feb 11ar Apr 11ay ,1,ll111l1,l,1,l1lllhl1111l1111111l11il11l1l1111111l1l1ll111ll1 Jun Ju 1 Aug The question is,

would it have paid to drop the short September Soybeans and remain long November Soybeans in an outright futures position? A quick look at the Soybeans chart will give us an answer. Ill give you an example of what I mean just ahead. 106 -50 -62 107. sx 66.00 11 ltt II I/ I /1 [1 l1ni 111 i, 64.00 lit i I I f it1f1 r 65.00 63.00 There is one additional conversion type trade that I want to show you before we move on to the next chapter. It involves the situation in which you are in a spread trade and the spread trendline goes flat. If, at that time, the futures are trending, you may want to convert the spread to an outright futures trade. Here is a picture of that happening in a spread trade, WVWU. 62,00 111 tll i11i11 1 /11 :d v11(! 61.00 60.00 7 59.00 56.00 Ihesprei 28 05 12 May 19 26 05 12 19 Jun 26 03 10 17 Jul 24 31 07 14 Aug trended. 212 200 187 175 162 150 137 125 112 100 87 75 62 1 e 1 e e e 50 37 25 12 The chart for

November Soybeans is shown above. September Soybeans were virtually identical in appearance Would you have been willing to jump from the safety of the nicely trending spread into the chaos of the outright futures chart? Only you can decide that. -12 -25 -37 -50 0 -62 -75 e My preference would be to stay with the spread. A futures trade can be mercilessly whipsawed in a market that is chopping sideways as are Soybeans pictured above. Volatility is high and the market has no direction, while the spread is trending nicely. The risk in the outright futures is far greater than the risk in the spread ·reii""iiar"""""""""""j,ipr" Profits for the spread will probably be less than in the futures, but not necessarily so. The outright futures trade may turn out to be a loser if the trade is whipsawed. From the third Friday in March until the third Friday in April, the spread line trended upward. The spread line then

began to go sideways What were the futures doing at this time? 108 109. . ,, , , , 1 11111, ,111,111111,II rlay Jun hl1illlllilhll illll 111111111I1111111111111 Jul Aug They were beginning to trend! wz 48,25 46,?5 Chapter 12 45,25 43,?5 Using Spreads to Reduce Volatility 42,25 40.?5 39.25 3?. ?5 36.25 20 27 Apr 04 11 18 May 25 02 09 16 23 Jun 30 O? 14 Jul 21 28 04 Aug Would you agree that in this instance, it would have paid to drop the short September Wheat and remain long December Wheat? The futures trended strongly, while the spread went nowhere until late in June. At that time, the spread would have turned against the position,long December Wheat and short September Wheat. One of the greatest threats to a futures trader can be price volatility in the futures market. Whereas an options trader can thrive on futures volatility, futures volatility materially increases the risk to any outright futures position. That is not to say that volatility in

and of itself is a bad thing. It is either good or bad depending upon your position and the way you trade. Tons of money have been made by trading short term volatility along a spread line. Yes, spreads themselves can become very volatile. This can happen even when the futures themselves are not particularly volatile. A market can become extremely volatile almost instantly. Who can forget being long the S&P 500 when it crashed in 1987? How many of those traders are still around? Who can forget being short grains when the nuclear reactor at Chernobyl experienced a melt-down? Believe me, many a traders account melted down right along with the plant at Chernobyl. Prices for grains and other foodstuffs become extremely volatile during droughts, floods, or pestilence. Prices of Gold, Silver, or other metals become volatile during worker strikes, threatened strikes, political instability, threats of war, etc. In like manner, Crude Oil and other petroleum based products can literally go

wild before and after OPEC meeting, API reports, Middle Eastern disruptions, etc. 110 111. Government reports of all kinds or speeches by dignitaries and government officials can set off wild price gyrations in the currency and financial markets. Extremes of volatility are increasing in both size and number. This is due to a major change in the composition of the markets. The markets now play host to large institutional traders, increasing amounts of managed money, and huge funds and pools These very large market .participants attempt to place large numbers of contracts into a market in their attempts to put on a position. Since most of them use similar models and mechanical systems, they tend to get trading signals at virtually the same time. There are only a few measurable factors with regard to price. You can ascertain the open, high, low, and close No matter how you analyze these four factors, there is bound to be correlation among the various analyses, and trading signals are

bound to be similar among those who use them. Now, lets take some specific examples and work them ~ough s?. you can see to what extent spreading is effective as a technique for reducmg volatih~. There are a number of situations in which this technique can be used. Can you think of any? In the first instance of using a spread to reduce the effects of volatility, I will be showing you how to enter a wildly volatile marke~ via a spre~d. For whatever reasons one might have for entering such a market, this method will suffice Here is a blow-off top in December Com. CZ 30 .DO( When a buy signal is issued on one model, it is bound to be issued on other similar models. This causes a mad rush to get long the market The volume of buying increases dramatically, and prices begin to rise In fact, they may explode By the time most of the funds, pools, and institutional traders have put on a position, there is precious little left to buy vl1en the overwhelming majority of orders are buy orders, a

market is precariously close to a collapse. it~ lY ~ ~"" it. The reverse is true when a sell signal is issued by the various correlated models. Everyone is trying to sell at the same time. When there are too many sellers in the market, the market is liable to collapse or turn into a huge chopping Trading Range. Trading Ranges are extremely difficult for most traders to trade. And so it goes. The markets have become more volatile than at any other time in my many years of trading, perhaps more volatile than at any other time in history. ~~~ ,I, 29 .25( 28 .50( 2?. ?5( 2? .00( 26 .25( 25 .50( 24. 75( 24. 00( There are only two ways I know to take away the effects of price volatility at times when they are not wanted. One way is with options, which has been adequately covered in my manual and course Trading Optures and Futions, and has no place in this work. A 04 03 30 2? s 0 N 08 D 12 15 J F 21 M The other way to take the sting out of volatility is with

futures spreads. Weve already discussed this somewhat in previous chapters I 12 113 M 02 29 25 21 A J J A You decide to look at the spread between September Com and December Com. CZ 125 0 112 100 0 87 30.00 J lN1~~ J~ ~~ 75 62 29.25 50 37 Z5 1Z 28.50 27.75 -12 -25 -37 -50 -62 -75 -87 -100. 27.00 26.25 ,~ 25.50 -112. -125. -137. 24,75 -150 . 24.00 -162. . I,,, It 11, 11," "" 1,111111," ,I ,11 1111111111111,1111111I11111111111111111111111111111111h1l1h11111111h11111111 Feb !tar 30 27 A 04 03 s 0 N 08 D 12 J 15 F 21 M 21 A 25 M J Apr Hay J Jul Aug A Lets asswne that when y oirsaw the top being put in place in late in June, you were sufficiently as~te to reahze there would probably be a second run to a top due to tlie f~ct that ~s 6:t"st top was created by major profit talcing by professionals. Your plan 1s to ~rut un~l a second top is attempted or actually made, and tlien to short the market ~th outrI~t

futures contracts. This type of trade typically occurs in midsummer m the grain markets, and it occurs in many years You note that at the time you want to enter, the spread line for long September Com and short December Com is rising, although subsequently the spread actually made money if held merely as a spread. The tremendous amount of volatility as Com made a top has been virtually neutralized. You would then be in position to either hold onto the spread, or drop the long September Com and remain short December Com, more or less at your leisure. Now lets look at another situation. 114 Jun 02 29 Suppose you were short a market, and suddenly the market moved and locked limit up against you. Can a spread help in that situation? One advantage in spread trading is the ability to extricate oneself from such a situation by offsetting the troubled trade using a distant back month. The reason this can work is that when you go out far enough, you are dealing with a different crop or

market situation, one that is not yet affected by the conditions extant in the market that is making the limit move. This situation is true in many of the grains and foodstuffs such as sugar, coffee, cocoa, and the meats KC iA~)!~ Conversely, if for some reason a trader is involved in the use of a back month for his outright futures trade, he may be able to offset by using a month that is closer to the front month, or even the front month itself. Just such a situation occurred in July Coffee futures, on a day in which prices for December Coffee futures moved limit up, and remained locked limit the entire day. Prices then proceeded to open locked limit on numerous additional days. Prices locked limit a sufficient number of days to have wiped out most trading accounts. Had you been short December Coffee futures or short December Coffee Call options, the situation was sufficiently desperate and traumatic to cause you to flail around in an attempt to extricate yourself from this

situation. As mentioned, one solution would have been to try to offset in a far distant month. However, far distant months in Coffee are sufficiently illiquid that execution of such a trade may not have been possible without having to incur an unusually large amount of slippage. My understanding is that in this case the nearest back month that did not also make a limit move was late into the following year. Coffee futures that far out trade quite thinly if at all, but if they did trade, it might have been possible to trade in such a month and thereby be saved from almost certain disaster. UEEJ<Ll l U 11-Limit iVJ, move 28000 27000 20000 25000 24000 23000 22000 fW fn; +i/1·}, 1t1 ,,,,yfl,,-~J 21000 20000 19000 1B000 17000 1£.000 15000 14000 13000 12000 11000 10000 9000.00 8000.00 7000.00 6000.00 5000.00 ll11i11,1l1il l1i1i.l1!1liil1l11ll111!1,ll1l11,ll111111lillill1l1l11llll11!111l1illl111lllll11 l11I AS O N D J F N A N J J A S O N D J F M AM J J S In light of the

fact that such situations can and do occur when trading futures, it is imperative for survival to plan for such contingencies. Plans must be made before disaster occurs. Prior to entering a short trade in Coffee, tnal spread Imes should have been examined in various other months in order to ascertain where a line of defense might have been set up. If a trader is serious about this business, he will plan his trades so that he always has A better solution turned out to be an offset in September Coffee futures. Ive included a weekly Coffee futures chart on the following page some sort of fall-back situation. If such a retreat is not available, then a trader 1s most unwise to entertain any position at all in the futures. Keeping in mind that you are looking at a weekly chart, can you see the enormous explosion that took place in Coffee prices? Many a trading account containing a short position in Coffee futures or Call options was wiped out in this move. In case youre wondering how

the daily chart for futures in December and September Coffee appeared, Ive included them on the next page. 116 117. r1 -- ~ -~y i f !/~ ,1 llf!ll ~~-~ ~ T4~~. -- Ult µ.J! J,J December Coffee makin& 14 limit days, 11 of them locked limit. r·r ln I ·Jr 246.00 240.00 234.00 228.00 2ZZ.00 216.BB 219.00 2111.BB 198.00 l!JZ.99 186.00 189.BB 174.09 168.99 162.08 156.BB 159.BB 144.BB 138.09 132.09 126.00 lZB.00 114.00 198.BB . , 1,1,1Jiif ,1 ,1,11,~i~,111111lllll1111Se11l11ll11ll1ill1111lli0cl1illtllll11llil,11111111hl1111111 ,-,, llou p September Coffee wu Dec 279.BB tradina duriq the days 270.08 when December Coflee was locked limit. Chapter 13 Trading Spreads Using Technical Indicators Not all traders enjoy trading simply based on chart patterns. In my many years of trading, I have come to the conclusion that not all traders can see the formations I use in my own trading. Additionally, some technical indicators are able to help you see forces in the

market that are unlikely to be clear without some sort of visual aid. In the remainder of this chapter, Im going to show you a technical indicator I have found useful in trading spreads whether they be seasonal or non-seasonal in nature. 261.BB 252.90 243.BB 234.00 225.90 216.BB 29?.BB 198.BB 189.09 189.BB 171.00 162.BB 153.BB 144.BB 135.BB 126.BB 11?.BB 198.BB 99.900 99.BBB Bl.BBB n.eee 118 The study that has evolved into what are now called "Bollinger" Bands is one that has proved to be most helpful in trading spreads. Bollinger Bands, when set with a 20-Bar simple moving average of the close and channel lines at two standard deviations, have the unique quality of containing approximately 95% of the price action for a spread. Since spread lines generally are drawn from close to close, one can expect that 95% of the spread line will be contained within the channel. This ability of Bollinger Bands to contain most of the price action makes them exceptionally valuable as

a measure of volatility. The wider the band width, the more volatile is the underlying price action. The narrower the band width, the less volatile is the underlying price action Bollinger Bands are extremely sensitive to large moves, which gives them additional value. The bands are quick to react to price development With these features in mind, lets look at a few spread charts containing Bollinger Bands to see how they can work to help in the trading of spreads. 119. peyou might be interested in seeing the September Wheat chart during this same riod of time. uu 19.000 18.008 17.080 483.00 176.00 469.00 462.00 455.00 448.00 +U.00 431.00 427.00 120.00 113.00 406.00 399.00 392.00 385.00 37B.00 371.00 361.00 16.000 15.000 11.008 13.000 12.000 11.000 10.800 WZ1WO 9.0000 8.0800 7.0008 6.0000 5.0080 4.0000 3.0000 2.0000 1.0000 r-rBB .0008 -1.0800 -2.0008 -3.0000 -4. 0000 11,ilhl11l1llll111111111,1l1l111I .J . ,,, ,,, 11llh11111,1111 ················· . ,, ,

,11ay Jun Feb llar Apr 357.00 350.00 343.00 336.00 329.00 322.00 Jul . ,ei> Mar • In the chart above, WZJWU, we see that the Bollinger Bands remained fairly con- . stant during most of the life of the spread. Spread volatility was quite moderate due During May and until the third week in June, spread volatility began to increase to uneasiness about the supply of Wheat. Did you notice that the increase in volatility was reflected by a widening of the bands during that period? Finally, when a shortage of Wheat became fully realized, September Wheat prices shot up as buyers wanted all they could get now, fearing the shortage in Wheat would drive prices even higher. The grab for September Wheat caused the spread how to invert and plunge downward. Notice the action of the Bollinger Bands in that quickly they responded to both price development and volatility. Do you see condition That great? the distance between the upper and lower bands became quite is indicative of extremely

high volatility. 120 ,. ,, ,,, h• , , . , , Play Apr 111111111.1,1hh1 Aug Jul1111111111!11 Jun 11illlhl1ll11111l1 Here you can see that during the time December Wheat was trending upwai:d Ill slightly faster than September Wheat, September was also in an uptrend. Then the of do~~ a in ~e~ulted which er Decemb late June, September outpaced to the spread line. Notice that in this case the futures volatihty was almost 1de~tl~al alnot 1s This chart. the on shown bar last the to June late from volatility spread May. of ~onth ways the case, and it certainly wasnt prior to and during I?ost ~fthe A close look at the bands will indicate that they were qwte different m the futures from those of the spread. u~per Bollinger Bands have other characteristics ~t make them useful. Whe~ ~emdica1s this band, upper the hugs line spread the and upward band begins to curve tive of a very strong move to the upside. 121 A Coffee spread, long September and short December, gives us a picture of

how prices can exceed the upper band and remain that way for eight trading days. Conversely, when the lower band turns downward and the spread line hugs the lower band, it is indicative of a very strong move to the downside. Prices turn down, exceed the lowar band and then bu& ---.l--the lower band . , , ,, ,,,,,,,,,,1llllill11l1l,11l1111l111l111l1,1,1l1111l11111I Feb !far Apr Jun ltdy Ju I -20.000 -30.000 -40.000 -58.000 --60.000 -?0.000 -80.000 -!ffl.000 -100.00 -110.00 -120.00 -130.00 -140.00 -150.00 -168.00 -170.00 -180.00 -190.00 -Z00.00 -210.00 -ZZ0.00 -230.00 -z10.00 -250.00 Aug The chart above shows the spread long August Gold and short September Silver. Do ~ou see that at first the spread was narrow, indicative of low volatility? Prior to making a strong downward move, spread volatility increased, reflected in the widening of the bands. At the end of March, the spread line dropped sharply below the lo~er band and remained outside the lower band for four days.

From then on, pnces tended to hug the lower band by consistently remaining in the channel that existed between the moving average and the lower band. 1.1000 4.0000 3.6000 3.2000 Z.8888 2.4008 2.0000 1.6088 1.Z000 .8000 .1000 .0008 -0.4000 -0.B000 -1.2080 -1.6000 -Z.0000 -2.4000 -2.8000 The spread line broke throup the upper band and remained at or outside the upper band for eipt days. -3.6080 -1.0000 -1.4000 -4.8000 ,,,,,, . ,,,,,,, ,, • ,,,,,,,,,, • ,,,,,,,,1,,,,,11,,,,,,,,,,,1,,,,,1l111,,,11,1l111ll1111l1lll11111llllll1lll11l11 Feb nar ·Apr Jun 11ay Jul For the spread line to remain outside the upper band for a period of eight days requires a mighty strong move in the spread differential. Such a move is the equivalent of an outright futures trade in which futures prices begin to move almost straight up. Such a move is often indicative of a blow-off, and is generally followed by either a strongly chopping Trading Range, or a complete turnabout in the price action

Interestingly, this particular spread had a seasonal tendency to move in favor of December Coffee rather than September Coffee futures just three days before the beginning of the spread widening in favor of September Coffee. Anyone blindly following an optimized entry date would have sustained a considerable drawdown for almost a month, until the spread finally turned over in favor of December Coffee. Ive shown how that trade developed on the chart on the next page. 122 -3.2000 123 Pattern exit. The seasonal tendency takes hold here.----,,:; The move up was counter-seasonal. KCZIKCU ., ,, , ,1, M<1r Ill,., , Apr 4.4000 4.D000 3.6000 3.2000 2.B000 Z.4000 2.0000 1.6000 1.2000 .8000 .4000 .0000 -0.4000 -0.8000 -1.2000 -1.6000 -2.0000 -2.4000 -2.8000 -3.2000 -3.6000 -4.0000 -4.4000 -4.8000 ,,,.,,,11,, 111I, ,l111,,111illl1li1111l1lil11111llllll1ill11l11ll!lll1111111i1 M<1y Jun Jul Aug As you can see, the seasonal tendency for December Coffee to outpace

September finally to.ok hold, and the spread turned in favor of December Immediately followmg the highest pomt of KCU/KCZ, the spreadline turned sharply down It then proceeded to break through the lower band Subsequent to what is shown above the spr~ad ~ine continued down":ard, hugging the band, for an additional five da;s at which time the optimized eXlt date occurred. The tum in the spread line came too la~e for my seasonal window. Had it not, I would have coupled my 1-2-3 formation with th~ Bollmger Bands to give me an entry signal. But supposing I wanted to take an outnght non-seasonal spread trade based upon an expected reversal after the blowoff? Lets see how that would have worked. Im going to turn the chart over so that it shows KCZ/KCU. 124 4.8000 4.4000 4.0000 3.6000 3.2000 2.8000 2.4000 Z.0000 1.6000 1.2000 .8000 .4000 .0000 -0.1000 -0.8000 -1.2000 -1.6000 -2.0000 -2.4000 -2.8000 -3 .2000 -3.6000 -4.0000 -4.4000 The optimized entry date is the same as the pattern

entry date. 1 · ""···· . , . · " M<1r 11 ·111 •··"·· . 1,, 11,,,,, , 11tl,,,,1l1111,111d111ll1111l1ll11111lllill1ill11l11llllll111111111 Apr May Jun Ju I Aug The chart shows what turned out to be bad entry on the optimized entry date. The trade is exited with a loss. Following the loss, there is a pattern reversal The reversal and breakout to new lows on the spread line give an opportunity for an entry into the spread KCU/KCZ. The exit from KCU/KCZ comes in conjunction with the entry into KCZ/KCU Such an entry can be anticipated following the very strong move in KCU as it counter-seasonally pulled away from KCZ. However, supposing you wanted to make an entry into this trade based solely upon technical indicators? Could that be done? Is there any specific indicator that might work well in conjunction with the Bollinger Bands? In the chapter that follows, we will explore the attributes of Bollinger bands. Following that we will examine

Welles Wilders RSI indicator in conjunction with Bollinger Bands John Bollinger likes to use a 9 bar RSI together with the bands Personally, I use both a 14 and a 9 bar RSI. Perhaps the two together, RSI and BB s, will provide just what you are looking for if you are a trader who prefers technical studies in your trading. 125 Chapter 14 Technical Filtering for Spreads Throughout most of my trading life, my most important tool has been the fonnations on the price chart, insofar as what I need to see. Yet there are times when I do use technical indicators to assist me in seeing things that are not easily discerned just by looking at a chart. One of the things I am unable to visualize is the location of two standard deviations. Another is the whereabouts of the mean deviation of a moving average of typical prices. Technical indicators are able to graphically display certain market properties not otherwise easily seen If you find charts confusing, then you may need help from an

indicator. If you do use indicators, keep them simple and make sure you use no more than two, and that they present different aspects of the market. For example, Bollinger Bands and the Relative Strength Indicator (RSI) are a good combination. Keltner Channel or most any channel method combined with any one of a number of momentum oscillators is usually acceptable. Why? Because channeling usually presents you with a measure of volatility as well as other enhancements. You can see the channel change width, indicating more volatility or less volatility All the oscillators with which I am familiar measure momentum, and to some extent, "overbought/oversold" How much is overbought? When is a market oversold? Who is to say? A market can be overbought or oversold for months, and thats why I really dislike those terms. When dealing with indicators, please realize that there are few things in the markets that are measurable. Moving averages of the open, high, low, close, or some

combination thereof are the basis for most oscillators. This means that all oscillators are more or less correlated An interesting study is called "On Balance Volume" (OBY). Here the designer coupled volume with a momentum oscillator OBV is useful in detecting signs of 126 127- accumulation or distribution. The indicator is created by taking a bars volume and adding it to a cumulative sum of the volume when the closing price is higher than the close of the previous bar. The volume is subtracted from the sum when the closing price is lower than the previous bars close OBY and a channel make a good combination that you might want to try. The reason for combining an oscillator with a channel is to gain differing perspectives of the price action. Confirmations of the two generally offer a strong entry or exit signal However, remember that indicators are always presenting you with history. They are always late. They cannot possibly indicate that which has not yet taken

place, no r can they ever be fully current. They cannot register their information until after pnces are settled. The closest I have ever come to making a technical indicator reflect what is current was when I created a pressure indicator based on the open rather than the close. The open is the most current fact available during any trading session. Why? Because the high, low, and close cannot be officially known until they occur, after tradmg has stopped. But the open is already history at the time when results from indicators based upon the high, low, or close have not yet been determined. Well be looking at a number of combinations to see how they may help in the trading of spreads First, well take a look at the combination of RSI and Bollinger Bands as applied to spread trading. Well begin with a more thorough explanation of the assets offered bv Bollinger Bands. Then well look at those offered by the RSI After that, well ·see how to use them together to trade spreads. Bollinger

Bands Bollinger Bands offer not only the visual aid of a simple moving average, but they also offer a ~o~tinuing ~ew of volatility as expressed through a moving average of standard deVJatlon. Bollinger bands are sensitive to extremes of deviation The resul~ is that the bands are quick to register volatile or non-volatile movement in price action. !he distance between the bands will quickly widen once a large movement in price 1s underway. Conversely, the band width will quickly collapse once the market becomes less volatile and reaches a level of relative equilibrium The number of bars 128 in the moving average (20) represents the intermediate trend. I have found that this adapts best to a daily chart of the spread line. When using Bollinger Bands, I choose to use two standard deviations, because at that setting the bands contain 95+% of the spread line. Any movement outside the bands beckons the trader to take notice. It is movement in price that causes the spread line to make

extremes. The most noteworthy movements of the spread line occur when the spread line comes close to or exceeds the bands. Neither Bollinger Bands nor other bands give entry and exit signals. They merely reflect whether the spread line is wider or narrower relative to where it has previouslv been. Bollinger Bands as well as other bands are best used in conjunction with a particular chart pattern, or with an oscillator that measures a different factor of the market action. For instance, I would not use Bollinger Bands together with Commoditv Channel Index (CCI). Bollinger Bands measure standard deviation of price and CCI measures mean deviation of price. Used together, they are multicolinear (Hows that for a mouthful?) Here are some comments taken from John Bollingers Capital Growth Letter, available from Bollinger Capital Management. 1. Sharp moves tend to occur after the bands tighten to the average (volatility lessens) The bond market and foreign currencies are good examples of

this. 2. A move outside the bands calls for a continuation of the trend, not an end to it Often, the first push of a major move will carry prices outside of the bands. This is an indication of the relative strength of one side of the spread over the other. 3. A sharp move outside the bands followed by an immediate retracement of that move is a sign of exhaustion. 4. Bottoms (tops) made outside the bands followed by bottoms (tops) made inside the bands call for a reversal in trend. S The bands can help in diagnosing double tops and bottoms, especially when the second part of the top (bottom) is higher (lower) than the first and lower (higher) in relation to the bands. 6. The average should give support (resistance) during bull (bear) moves 7. A move originating at one band tends to go to the other band This is useful for projecting price targets early on and provides revised targets as events unfold. . Now lets examine a few spreads in conjunction with the bands in order to see some

of the features mentioned above at work. Please keep in mind that Bollinger Bands in and of themselves are insufficient for giving entry and exit signals. They must be coupled with either chart patterns or a technical indicator. 129 e (volatilSharp moves tend to occur after the bands tighten to the averag ity lessens). trend, not an A move outside the bands calls for a continuation of the prices outend to it. Often, the first push of a major move will carry h of one strengt side of the bands. This is an indication of the relative side of the spread over the other. KCK/KCU Bollinger Bands tight en·- -----L J 1ll1i1ll1iil1111111111l1il1,1,,.,,, ,,1,,,,,,l11 ,,,D~t••- 11 "J~~•,,1.,,,,,11,,,1~~~11ilililll11~1ll111!1lll May Apr ar 130 SIK/GCJ 21.000 20.250 19.500 1B.750 18.000 17 .250 I 16.500 15.750 15.000 14.250 13.500 12.750 12.000 11.250 10.500 9.7500 9.0000 B.2500 7.5000 6.7500 6.0000 5.2500 4.5000 3.7500 13.000 12.000 11.000 10.080 9.0000 B.0000 7.0000

6.0000 5.0000 4.0000 3.0000 2.0000 1.0000 .0000 -1.000 0 -2.000 0 -3.080 0 -4.000 0 -5.000 0 -6.000 0 -7.0000 -B.000 0 -9.000 0 -10.000 . 1, Dec l11l111l111il1illl1111111,,illl11i111 . . , ,,,,,,1,11l11111111l1i11ll1!,ll1l111l May Apr Mar Jan Feb 131 A sharp move outside the bands followed by an immediate retracement of that move is a sign of exhaustion. Bottoms (tops) made outside the bands followed by bottoms (tops) made inside the bands call for a reversal in trend. WSZISSX A sharp move outside the band followed by a major retracement resulted in exhaustion. . ·",,, ,, 11 , ,, , ,, " " " Mar Apr 1, " . ""","" May ,11il1111Jl111, 11lilill!IIIIIIIIJllll11illlllii I1111/ 1A1lilli11li11111111111311 II un u LCV/LCG -40.000 -50.000 -60.000 -70.000 -80.000 -90.000 -100.00 -110 .00 -120.00 -130.00 -110.00 -150.00 -160.00 -170.00 -180.00 -190.00 -200.00 -210.00 -220.00 -230.00 -240.00 -250.00 -268.00 -270.00 ll!J ep

A top made outside the band followed by a top inside the band, indicates a possible ~d4 . ,,,,,,1,,,,,11,,,,, 111,,,,,,,,M~lylill,,,,,,111, J~~l111,llll111111J~·i",ll11111111ll1~~~1l1111ll1lllili~l Mar Apr I might add based on my own observations, the retracement must be substantial for this to be true. 132 133 .6000 .4000 .2000 .0000 -0.2000 -0.4000 -0.6000 -0.6000 -1.0000 -1.2000 -1.4000 -1.6000 -1.6000 -2.0000 -2.2000 -2.1000 -2.6000 -2.8000 -3.0000 -3.2000 -3.4000 -3.6000 -3.8000 -4.0000 The bands can help in diagnosing double tops and bottoms, especially when the second part of the top (bottom) is higher (lower) than the first and lower (higher) in relation to the bands. LCVIIJ{V Triple tops, none 21.800 makina: it above 21.100 The moving average· should give support (resistance) during bull (bear) moves. 112.50 111.75 111.00 110.25 109.58 108,75 10B,00 107.25 106,50 105.75 105,00 101.zs 103.50 102,75 102.00 101.25 100.50 99.750 99.000 98,250 97.500

21.000 23.600 23.280 22.800 ZZ.100 22,808 21.600 21.208 20.808 20.100 the band line. 20.000 19.600 19.208 18.800 18.100 18.000 17.608 17,288 16.800 16.100 16.000 . ,""""""""""""""lll"""""ll111,11111i1111 1,1111llhll11111till l11lll111 ll111ll1lll1 lktr Apr llay Jun Jul Au9 II I 96.750 96,000 15,600 Sep 95.250 llll11,,,,,,,,,, . , . J~n f;;i,""""" 1,,1lll1l11l1lll11111l11lll1111l111111lll11ll1l,1lll1ll11,1111 Mar Apr May Jun Double tops and bottoms of the kind described above are not generally encountered when trading spreads. I looked through dozens of charts to find the one shown above. Some chartists would have labeled this a double top. 134 135. RELATIVE STRENGTH INDEX 9barRSiof A move originating at one band tends to go to the other band. This is useful for projecting price targets early on and provides revised targets as events unfold. I

suspect that this would better be restated as: A move originating at one band tmds to go towards the other band This is useful for early projection of spread differential targets and provides for revised targets as events unfold. Swiss Franc prices. 0--------------------------------------------------------- ------------ .9200 .9150 .9100 .9050 .9000 .8950 .8900 .8850 .B800 .B750 .8700 .B650 Prices originating at one band tend to move towards the other band. Mar Apr 11ll111l1il1l1111llllillllll ····•····•······ ····················"11ll111111illl11,11l111l111l111l11 Sep Aug Jul May Jun Now lets take a look at RSI and see what it has to offer. 136 -0.6920 -0.6%0 -0.7000 -0.7040 -0.70B0 -0.7120 -0.7160 -0.7200 -0.7240 -0.72B0 -0.7320 -0.7360 -0.7400 -0.7440 -0.74B0 -0.7520 -0.7560 -0.7600 -0.7640 -0.7680 -0.7720 -0.7760 -0.7800 -0.7840 .8600 .8550 .8500 .8450 .8400 .8350 0 May Jun Jul

Aug ------------- ------------ .8300 .8250 .8200 .8150 .8100 .8050 Sep Oct Much has been written about RSI. There are many who teach it and are expert at using and interpreting it. To the best of my knowledge, Welles Wilder is the originator of RSI, and I present it here because John Bollinger has had good results using it in combination with Bollinger Bands. For more in-depth information about RSI, I suggest reading Wilders book, New Concepts in Technical Trading Systems, available from most book distributors. RSI presents a graphical view of a ratio that looks at the net change in price taking place during each time period for which it is invoked. The average net amount that price has moved up during that time is measured against the average net amount that price has moved down. Therefore, RSI purports to measure two things, price momentum and the (infamous) overbought/oversold condition of a market In measuring overbought/oversold, it is no better (or worse) than any other

indicator used to measure this somewhat fictitious condition of a market. 137. 9barRSiof Swiss Franc prices. .9200 .9150 .9100 .9050 0--------------------------------------------------------- ------------ .9800 .8950 .8900 .8850 .8800 .8750 .B700 . 8650 .8600 .8550 .8500 .8450 .B400 0 ----------------- -------- .8350 .8300 .B250 .B200 .8150 .B100 .8050 May Jun Jul Aug Sep Oct Another use for RSI is that of offering a visualization of divergence from its peaks and troughs relative to the highs (peaks) and lows (troughs) in actual futures prices. RSI is plotted over horizontal grid lines indicating the 20%, 30%, 50%, 70%, and 80% levels of an absolute vertical scale that can go no higher than 100 or lower than zero. Interpretations of RSI It is said that when markets are choppy and generally moving sideways, you should consider being a buyer when prices diverge lower and RSI is rising, and consider being a seller when

prices diverge higher and RSI is falling. It is also said that when markets are trending, you should consider being a buyer when RSI crosses above the 50% RSI grid line, and consider being a seller when RSI crosses below the 50% RSI grid line. 138 Another interpretation of how to use a 14 bar RSI states that when a market is choppy and moving sideways consider selling when the RSI movement is above 70% (overbought), and consider buying when the RSI movement is below 30% (oversold). The percentages are increased to 80% and 20% when using a 9 bar RSI When a market is trending and a 14 bar RSI is being used, the 80% level becomes the overbought indicator and the 20% level becomes the oversold indicator. I have underlined the word consider because too many traders blindly and mechanically trade the RSI according to the methods indicated above. Unfortunately, such trading is done to their own financial destruction . It is important to recognize the strengths and weaknesses of RSI in order

to properly use it. Among its strengths are the fact that it smoothes distortions that would occ~ ~s old prices are dropped off and new prices added into the formula. In the opllllon of some, a strength is found in the constant vertical scale. By fixing the amphtude ~f the scale from zero to 100, RSI provides a constant band for purposes of companson. Other oscillators do not use a fixed scale and therefore make it possible to compare an extreme move relative to a previous extreme move. The weaknesses of RSI are identical with its strengths. How much smoothing is the correct amount? Should you use 14 bars of smoothing, 9 bars of smoothing, or some other number? Should you change the smoothing factor if prices begin to trend? Should you change the smoothing factor if prices cease trending? Obviously, a 9 bar RSI, at times, is going to give substantially different signals than a 14 bar RSI. Youll have to decide for yourself when to use 9, 14, or some other value for RSI. Is a constant

vertical scale the best way to view the net changes in price? There are those who would argue that a variable scale w@uld be better. A constant scale causes an oscillator to scrunch up and become meaningless in a trending market. So called overbought/oversold readings become virtually worthless. Since our purpose here is not to argue the merits and inadequacies of RSI, lets now view some RSI charts in order to show you the various interpretations and methods 139 · of trading with RSI. After that, we can view how it works best in conjunction with the Bollinger Bands for profitable trading in spreads. When markets are choppy and generally moving sideways, you should consider being a buyer when prices diverge lower and RSI is rising, and consider being a seller when prices diverge higher and RSI is falling. HOX/HUX -0. 0015 with 9 bar -0. 00&0 RSI -0.0075 -0.0090 -0.0105 -0.0120 -0.0135 -0.0150 -0.01&5 -0.0180 -0.0195 -0.0210 -0.0225 -0.0210 -0.0255 -0.0270 -0.0285

-0.0300 -0.0315 Prices -0.0330 -0.0315 diveri:e -0.03£,0 lowe·"------l -0.0375 -0.0390 80 ------------------------------------------------ --- ---- - 20 -------- --- llay 140 Jun RSI diverges biper resultiq in a buy sipal Ju I ftig Sep Oct 141 When a market is choppy and moving sideways, consider selling when the RSI movement is above 70% (overbought), and consider buying when the RSI movement is below 30% (oversold). The percentages are increased to 80% and 20% when using a 9 bar RSI. When markets are trending, you should consider being a buyer when RSI crosses above the 50% RSI grid line, and consider being a seller when RSI crosses below the 50% RSI grid line. W/JCZ with 14 USH/TIIH 716 7011 616 600 516 165.08 500 1&11.08 116 155.08 1011 316 158.00 HS.BB 118.00 135.1111 300 Z16 Z00 138.08 116 1011 125.08 16 lZB.08 -116 115.08 110.08 105.00 108.08 95.0118 -Z00 !Ill.BBB -216

99.008 0 -16 -100 B5.008 -300 -316 .rSell 80------------------------------------ ----- ----- -79----------------------------------- 58 -------------------------------------------------·--- ---------------------------------30- -------------------------------- lBuy ze !lay J11n J11 l Aug 142 Sep Oct 15.08 198.08 185.89 188.00 175.89 170.08 Z0 --------------------------------- -----------------------Oct Sep Au.g J111 J11n nay Apr nar 143- When a market is trending and a 14 bar RSI is being used, the 80% level becomes the overbought indicator and the 20% level becomes the oversold indicator. CLZICLJ with 14 bar Now that weve seen some examples of how people interpret and use RSI signals, lets combine these signals with optimized entry dates, the 20-day window, and Bollinger Bands in order to see how technical indicators can work for spread trading. .4500 .4200 .3900 .3600 .3300 .3000

.2700 .2100 .2100 .1800 .1500 .1200 .0900 .0&00 .0300 .0000 -0.0300 -0 .0600 -0 .0900 -0.1200 -0.1500 -0.1B00 -0.2100 -0 .2100 :::::: :Fv4:: :::::::::::::::::::::::::::: : : : : :-------; r 20 --- ------ -- --- -- ----------------- --- -----Apr May Jun 144 .Oversold Jul 145 Chapter 15 Seasonal Spread Trading with Bollinger Bands and RSI A trade with which Ive been familiar for many years is to get long October Live Cattle and short the following Februarys Live Cattle around the third week in June. Moores Research Report lists the optimized entry date for the year shown at June 22. This means the window for this trade opened on June 8 The chart below begins with the way the chart looked on that date LCVILCG with 20 bar -0.6000 -0. 7S00 BB ~ 18 =tiiii -1.3S00 -1.S000 -1.6S00 "-1/ =i:~::: -2 .1000 -Z.ZS00 -2 .1008 -2.5508 -Z.7908 -2.8508 -3,BBBB On June 8, we see that the mari<et is clearly trendini: with prices remaimngin the upper portion of the

channel However, BB does not in and of itself live a buy si1111al, We need to fdter this trade with RSI to get a conlinning ently signal. 146 147 -3.1588 -3.3808 -3.1508 -3.6008 -3.7508 -3.!IBBB -4.8500 LCV/LCG With20 bar BB n June 8, we see that the market is dearly trending with prices remaimn& in the upper portiDD of the channel However BB does not in and of itself give a buy signal. We need to filte~ this trade With RSI to get a confirmm& entzy signal. -0.6000 -0.7500 -0.9000 .§18 -1 0500 -1.2000 -1.3500 -1.5000 -1.6500 -1.8800 -1.9500 -Z.1000 -Z.2500 -Z.4008 -Z.5500 -Z.?000 -Z.8500 -3.0000 -3.1500 -3.3000 -3.4500 -3.6000 -3.?500 -3.9000 -4.0500 A few days later, with the Bollinger Bands holding fairly steady, prices begin a retracement falling below the moving average line and reaching across to the lower BB line. RSI crosses below the 50% line It is now June 15 If prices were to begin moving up so that RSI moves above its 50% line, I would want to enter the

trade LCV/LCG. LCV/LCG withlObar BB I WOllld he tempted to take a bounce oft" the lower BB if RSI also confinns and prices are still within the time window. 14 bar RSI There is no clear cut buy si&n,al from RSI to go alon1with the uptrend in the chart above. I would prefer to wait and see if a buy signal emeries within the next20 days. -0.6000 -0.7500 -0.9000 -1.0500 ----- ---------------------------------- ----------------------------- -1.3500 -1.2000 -1.5000 ------------- -1.6500 -1.B000 -1.9500 -Z.1000 -Z.2500 -2.4000 -Z.5500 -Z.7000 -2.8500 0---------------------------------- ----------------------------------- - -3.0000 -3.1500 ----------------------------------- ----------------------------------- -3.3000 -3.4500 nay Apr Jun Mar -3.6000 -3.7500 -3.9000 -4.0500 148 -0.6000 -0.7500 -0.9000 -1.0500 -1.2000 -1.3500 -1.5000 -1.6500 -1.8000 -1.9500 6/15-Z .1000 -2.2500 -2.4000 -2.5500 -Z.7000 -Z.8500 -3.0000 -3.1500 -3.3000 -3.4500 -3.6000 -3.7500

-3.9000 -4.0500 14 bar RSI If RSI crosses above the 50¼ line I would he tempted to enter the seasonal trade LCVILCG. B0- -------------------------------- --- - - 30------------------------------------------------------------------20 nar Ar 11a 149 Jun On the oppos ite page we see an actual entry signal. Do you see that RSI has cross ed the 50% line, and prices themselves are a hair above the simple moving average line of the Bollinger Bands? It would be quite easy to make a mechanical entry here, but it is much better to enter based upon an understanding of what these indica tors are telling us. The entry signal was given on the 20th and again on the 22nd, the optim ized entry date. -0.600 0 -0.750 0 -0.900 0 -1.050 0 -1.200 0 -1.350 0 j/2O-1 .5000 -1.650 0 -1.800 0 -1.95011 -2.100 0 -2.250 0 -2.100 0 -2.550 0 -2.700 0 -2.850 0 -3.000 0 -J.150 0 -3.300 0 -3.450 0 -3.600 0 -3.750 0 -3.900 0 -4.050 0 The

norm al expectation for a trend is that it will continue. Are the indicators pointing to a continuation of the trend? Lets see RSI is a momentum indicator. If prices were to cause this indicator to again rise above the 50% line, what do you think it would mean? In my opinion, this would be a clear indication of a reversal in the short term momentum and possib ly a continuation of the longer term trend momentum. Bollin ger Bands give us a picture of volatility. Certainly there has been little chang e in the volatility depic ted by the bands. The distance betwe en them has remai ned fairly const ant. If volatility were to drop off, might we not suspe ct that the move is weak ening and that prices are ready to move sideways and not continue to trend upwa rd? The 20 bar simple moving average of the Bollin ger Bands is a trend indicator. This movin g avera ge is usually based on the close althou gh you may want to base it upon the open or even an average daily price. Prices have moved just

above the simple movin g average. This means they now reside in the upper channel. This too is indicati ve of a continuation of the trend 80 - -------------------------------------------I It is the combination of th~se technical factors in conjunction with the fact that we are in the seaso nal window that make this a strong entry signal. At the very least, I would be willing to make an attempt. The fairly high reliability of the optim ized entry date is a contributing factor. That date is only two days in the future. How does one enter such a trade? If able to monit or the market intraday, I sugge st that a softw are alert can be set to signal the event of RSI crossing the 50% line, prices movin g above the simple moving averag e, or both. If unable to monitor the mark et intraday, an entry differential can be exactly or approximately (depen ding upon availa ble tools) ascertained based upon the moving average. The order can then be phone d into a broker for

execution should that price differential occur. 150 ------ ------ --- - ~ v--- ----j 30---- - - - - -- -- - --- -- -- -- ------ ---- -- ---- ------ - ------ -20 Apr Md!I J 6/20 - - ----------- J -un 151 ~ - --- Below, you can see the results of this trade. If entry was not made on the 20th, it most certainly was possible on the 22nd or 23rd. •.ic+-,""----6/lO and 6/22 entries were ahnost identical. 818, RSI pes reversal •iiln I I II I III I II I I I I ii I I I 111 I I I 11 I 11111 I I I 111 I I 111 I I 11111 I I I I I I I I I 11 1 I 111111111 11 11 nay Jun Jul Aug . 0000 -8.1500 -0.3000 -0.1500 -0.6000 -0.7500 -0.9000 -1.0500 -1.2900 -1.3500 -1.5000 -1.6500 -1.8000 -1.9500 -Z.1000 -Z.2500 -2.1000 -2.5500 -Z.?000 -2.B500 -3.0000 -3.1500 -3.3000 -3.1500 It is my firm belief that in order to maximize profits and minimize losses,. entries and exits should be considered in completely different ways. If

you are gomg to enter trades with technical indicators, you should exit them using a chart pattern. In a trending market, this technique has given the best results over a period of many years . Lets look at one more seasonal spread trade using technical indicators before moving on to the next chapter. Buying next years May Sugar #11 and selling this years October Su~#~ 1 is another high percentage seasonal spread that had worked 100% of the tune m a succession of 15 years. Both May and October contracts have good open interest, and ??th hav: ~dequate volume. World Sugar is one of the most widely traded commodities and 1t 1s traded well into the future as the commercials use vast quantities of it and have a need to hedge long term. The trade is typically entered in the last week of July, and the Moore Research Center listed this trades optimized entry date as 24 July, with an optimized exit date of 4 September. Lets begin looking at this spread 10 days prior to 24 July. We will begin

with 10 July, which is the opening of our seasonal window. What about exiting from this trade? Certainly exit could have been made from the simplest technical indicator of them all, a trendline. My own preference is that of natural support (a chart formation), which gave the best exit in this case. Coincidentally, the optimized exiCdate also gave a profitable exit on the same day that exit could have been made via the trendline. The worst exit would have been that of a crossing of the Bollinger Band moving average or the crossing of the 50% line of the RSI. Both occurred on 8/8 We want to coordinate any signals from RSI together with the status of the Bollinger Bands. We want to keep in mind volatility, momentum, divergence, if any, and the so-called overbought/oversold condition of price in the event the ~arket is ?1o~g. sideways These factors constitute the essence of trading spreads usmg technical md1cators. In any event, we want to see clear cut signals from our indicators or we

will not trade. SBK/SBV follows on the next page. I do not believe that using the same technical indicator for entry and exit necessarily makes any sense. However, this is exactly what most mechanical systems do I also believe that is why most of them lose. By the time the cumulative forces that generated the entry signal reverse, most of the profit, if any, is gone. All too often the result is a net loss for the trade. 152 153 - SBK!SBV The spread is not indicating steady volatility, not has it recently been trendini:;. Recent volatility has been relatively i:;reat The band lines do not indicate an uptr nd in progress. -0.0600 -0.0900 -0.1200 7/lO -0 .1500 +-0 .1800 -0.2100 -0.2400 -0.2700 -0.3000 -0.3300 -0.3600 -0.3900 -0.-!200 -0.4500 -0.4800 -0. 5100 -0.5400 -0.5700 -0.£,000 -0.6300 -0.6600 -0.0900 -0.7200 -0.7500 above the moving average is no indication of trend. However, it is indicative of momentum. Momentum alone is not sufficient for an entry at this time. Neither

the 9 bar RSI above or the 14 bar RSI show any divergence from price. RSI is showini: momentum. It has crossed ihe 50% marker, but is well within the bounds of neutrality. It is moving sideways in a sideways market On 7/13, after a brief one-day correction, prices rise sharply and penetrate the upper BB. Once ai:ain we have upward momentum. However, look at the bands themselves They they are not trending. The upper band is moving up and the lower band is moving up and · 0000 the lower band is moving down. The distance between the bands is widening This is indicative of an increase in volatility. It is not uncommon 0 : 8980 for prices to move rapidly from one band to the other when -0 .1200 volatility increases. -0 .1580 -0.11180 -0.2100 -0.2400 -0.2780 -0.3000 = =: · -0.3300 -0.3&00 -0.3900 -0.421!0 -0.4500 -0.4800 -0.5100 -0.5400 -0.5700 -0.6080 -0.0300 -0.6600 -0.6900 After all, EE is a measure of ~ volatility. As you can see, it is quick to pick up the fact that this

market has become more volatile. But WI! still are in need of direction The 14 bar RSI baraely confinns ihe momentum of the price move as set ai:ainst the EBs. The indicator has not reached the "onrbou&lit" level. However, the fact that price has penetrated the upper BB line may be indicative of a trend that will continue. At this point, it is better to wait. This is quite bften where the amateur trader is separated from the pro: fessional What appears to be a major move in price is not really that much of a move 0---------------------------------------------------------------------- 0---- ------ ---------------------------- ------ --- 0 ---- ·-r1--~-~-----~~~--------------------------------- ---f J ~--v~---- ~ -----~----- 7/13 0 0 0----0

0------------------------------------------------------------------------------------------------------------------------------------Apr 11ay Jun Jul Apr ltay Jun Jul The 14-Bar RSI (not shlfflll) is halfway between the SO% and 70% lines. Topther, RSiand BB are indicative of a sideways marlcet with prices bouncing from one extreme to the other. If anythin1, I would be tempted to short this spread on "overboue,ht" condition of the RSI 154 The scale on which the chart is shown can be deceptive as to the mapitude of a move. This market has been moving sideways The price scale will tend to magnify the size of the move We still do othave a dear indication of direction Entry at this point cairles more risk than I am willing to take 155 SBK/SBV By 7118, prices have moved even higher. They have been outside the upper BB for several days. A pull-back here and then another advance would cause me to enter the spnad. As yet we have no continuation from the lower band that

we are indeed trendin&, All we really have is a sudden and definite increase in volatility. BB in and of itself is not sufficient for ltBJIBlatina entry si111.als We still han to rdter through .J/18 0300 .0000 -0.0300 -0.0&00 -0.0900 -0.1200 -0.1500 -0.1800 -0.2100 -0.2400 -0.2700 -0.3000 -0.3300 -0.3&00 -0.3900 -0.4200 -0.4500 -0.4800 RSL By 7/1.4, prices relative to the BB have phm1ed across and below the movin1 averqe. This is not unusual in a sideways choppin8 market Volatility remains high but steady. The lower BB has tumed upward and now both bands are .0600 .0300 .0008 shawin& an uptrend. Any crossover to the upside of the simple mcrrin1 average, if confirmed by RSI, would cause me to e n t ~ trade. + -0.03110 -0.0&011 -e.a0 -0.1200 -0.1500 -0.1800 -0.2100 -0.2400 -0.2700 7124-0.3000 -0.3300 -0.3&00 -0.3900 -0.4200 -0.4500 -0.4B00 -0.5100 -0.5400 -0.5700 -0.&000 -e.&300 -0.5100 ·nthe market begins to trend, this line will.tum up

-0.5400 -0.5700 -0,£,000 " I " Apr " II I " " I " " !lay " " I I I I " I I II 11 II III Jun I I II ti I I I I 11 I II I I " Ju 1 -0.&300 -0.&&00 I,.I1, , Not only do WII have a failure of the lower BB to tam in and upward, WII also have no confirmation from the 14 bar RSI that there has been a real change in momen- RSI, -which never did confirm the move in price, has now 1one well below the 50o/o line. I would now suspect that the dinrgence between price and the RSI has been of real significance. Being patient with this trade has paid off tum. In fact, while prices are malcin1 a new hilh, RSI is somewhat dinrgent in that it is failing to make a new high. This could mean that temporarily, at leasl this move is runnina out of steam. ------------------------------------------------------------- --- --------- ----------------------------------------------------- -- --7119 RSI is

failine;to confirm. 7/24 0---------------------------------------------------------------------0 0---------------------------------------------------------------------- Apr Hay Jun Jul It remains to be seen ifWII have a real move here or not. We are still a few days shy of the optimized entry date. 156 0 -------------------------------------------------------------------1111.y Jun Jul Im not denying that some money could have been made by entering at the be&innin1 of the time window based on price move alone, but such tradina results in losses more often than not. Since 7/14 is the optimized entry date, lets continue to monitor this trade for another 10 days. At the time the 20 day window closed, it was obvious that prices had reversed and were in a large chopplnc Trading Rance. The optimized date had utterly £ailed. Since we are trading here only with technicals, we have precluded findinc

out ,my, £1lllllamentally,., are seeing such a divergnce with the past 15 years 0£ success in this spread. As it tund out, there was a presently percaind shortage or ngar, worldwide. HaweTer, BB is not yet sipaling a downtrend in the spread. .1208 .09118 .0100 .0000 -0.0100 -0.0800 -8.1200 .06011 .0300 .0000 -8.03811 -0.06110 -0.1600 -0.0900 -8.1200 -0.zeee -8.Z100 -0.zee0 -8.3200 -0.3600 -0.15011 -0.1800 -0.2100 -0.2490 -0.2700 -8.3000 -0.33110 --8.1000 -8.1100 -0.1800 -8.5200 -0.5600 -0.&0011 -8.6100 .214-86800 -e.?Z00 --8.7600 -0.8000 -0.8100 -0.3600 -0.3900 sn-0.1200 += -0.1500 -0.111110 -0.5100 -0.5100 -8.5700 No trend is nident, only a lot oholatility. I ""ti ,II I I I I II I I " ii I 11 II I I I I " The 14 bar RSI is doinc the reverse of what it did earlier. It is Janine the price move. It is not giving any signal at all other than haYina crossed the SOo/e line The same things we said aboutwaitincfor an upward move are nowtme ofwaitfor

a downward move. HaweTl!I, our 20 day window closed with the completion of 817. 0 ------------------------------------ -------------------------------- llo.y Jun Jul Aug It mipt interest you to know what happened after tbe closing of the 20 day,nndow. The optimized e:m date for this trade does not occur until 9/4 I belieTe that when you see it, you will be convinced of the wisdom extant in folluwml( sipals or lack thereof &i,ven by these indicators should you choose to use them. 158 Jun Jul L, II I I I I I I I, I I I ii I I ii ii, I1111 Aug I I I Ii ISep II II I 0 11909 - • The chart above shows the final outcome of SBK/SBV at the time of the optimized entry date. Shortly after the 20 day window, there was a truly clear, non-seasonal entry signal. I would be remiss ifl didnt show you this event It will serve to make an additional point of which I feel you should be aware: Whereas a price chart always reflects all the knowledge that is in the market, it cannot

possibly show knowledge that is soon to be included in the market. Nothing I know of can foretell the future. The fact that the spread failed to act in accordance with its historical profile within the 20 day window served as a strong warning that all was not fundamentally as it should be. Although this in itself was not predictive of future price action, it still offered a situation in which great caution should have been taken with regards to the fundamentals that were underlying the sugar contracts. There is an inherent weakness in blindly following a mechanical system. We saw that weakness in the previous Cattle trade and now again in this Sugar trade. 159 The si al to reverse e ectations and enter SBV/SBK is shown on the next chart. SBV/SBK On 819 prices made a DBW law for the entire series of prices shown on the chart. . That new low caused the upper BB to tum over and clearly indicate a downtrend The lower BB was already indicating a downtrend in force as was the simple

moVllll avera,ie, In other words, all three se1111ents of the BBs showed a .2500 .2008 .1508 .1000 downtrend . ,0500 . I Sunp e downtrend , 0009 -0.0508 -e.1000 -8.1500 -0.2000 -0.Z588 -0.3800 -0.3500 -0.4008 .819-e 4500 -0.5000 In conjunction with this event, the bands beaian to -0.5500 remained There apart. distance manifest a steady -0.6000 -0.6500 only a confirmati on from RSI that it, too, was trendJn& -0.7000 down and not already in an "oversold " state (i.e, below the 20% line) -0,?500 -0.8008 -0.8500 0 ·-------- --------- --------- --------- --------- --------- --------- ----- 0---------------------- -819 RSI is not 0 --------- --------- --------- --------- --------- --------- --------- ltay Jim Jul -----ove rsold. Aug have Reversing the trade, SBKJSBV to SBV/SBK on a non-seaso nal basis would that i.e, ion, considerat into taken were als fundament simple if been a good idea World Sugar was perceived to be in short supply. A final word about

counter-seasonal spreads is in order here. Whenever you are confronted with counter-seasonal trades, it is a good idea to extend the expectation of such counter-seasonality to all trades within the same or even related markets. It is not unusual for counter-seasonality to continue for some time. You can make some wonderful trades from markets that are moving against their normal seasonal pattern. When you see them, jump on them You will have little if any competition from other traders. Typically, when a seasonal spread goes the opposite way than expected, there will be a substantial move, one from which you can profit greatly. 160 16t PART II OUTRIGHT SEASONALS 162 163 Chapter 16 Introducing Seasonals Ive been showing you concepts and techniques using line charts. I know that most of you are not as familiar with line charts as you are with bar charts. Please be aware that the techniques Ive shown you regarding Bollinger Bands and RSI are as equally applicable to bar

charts as to line charts. Now, in Part II, I am going to show you techniques using bar charts that are equally applicable to the use of line charts. Ive chosen to show these techniques using bar charts because of most readers greater familiarity with them. In Trading bv the Book I presented a concept that I am going to repeat here. It is one of the overriding principles of all trading. The concept looks like this: Usually, it will continue - - - > When momentum 164 165. What must be realized is,- that when fundamental conditions exist that impart momentum to a market, most of the time that momentum will continue. This is a rather simp~!stic ~~~lanation and certainly there is more to it than what Ive just shown. The more 1s found m the center of the chart, typically called a retracement or correction. The retracement or correction is much shorter in time and much smaller in magnitude than the rest of the move. The causes of the retracement are several and can occur in a

variety of ways depending upon the participants. The reasons, and how the participants fit into the pic~e, are taught at my seminars, but I wont leave you without a clue. One of the maJor causes of every retracement is that of profit taking Chapter 17 What is a "Seasonal?" For purposes of this course, a seasonal is an outright futures trade whose main reason for entry is that it falls within an optimized window in time. In other words, the primary filter for a seasonal futures trade is a time-tested entry window. Why Trade Seasonals? In periods when markets are retracing, the magnitude and extent of the retracement !s largely dependent upon who the participants are and their reasons for taking profits where and when they do. Ill give you another clue, one that anyone who aspires to trade must always take into consideration The markets are driven by fear and greed, and of the two, fear is the more pervasive. Before I introduce the various techniques and tools that I use

for trading seasonals, I need to explain just what I mean by a seasonal trade. 166 Over a period of many years, seasonal entry signals for trades have proven to be among the most consistently effective and reliable of all entry signals. This does not mean that one can blindly enter a seasonal trade without the use of other entry filters, but when trading seasonal trades in futures, the primary rationale for the trade is the fact that it is taking place during a time period that has repeatedly proven to be a "best" time for successful entry. The chances for a winning trade are greatly multiplied. My Own Experience Decades ago, when I was being taught the art of trading, I was instructed to memorize certain seasonal trades. I was taught that at certain times of the year various commodities had a tendency to rise, and at other times of the year those same commodities had a tendency to fall 167. In fact, much of my early trading success centered around the reliability of

seasonal trades. At that time I did not have the benefit of a commercial computerized service to assist me in selecting such trades. I was taught most of them Those in which I was not directly instructed I learned as a result of studying charts and information available from the exchanges. I also learned some of them from the work and research of brokerage firms and other traders The entire process spanned many years of trading. As with seasonal spreads, outright seasonal futures trades must be filtered by means other than a simple time window. In my opinion, filtering seasonal futures is more difficult than filtering seasonal spreads. Lets take a look at the advantages and disadvantages of seasonal futures. Advantages of Seasonal Futures The main advantage to trading seasonal futures is the enhanced opportunity for success. Another benefit is the lack of competition in these trades In their anxiety to get nch qmckly, most traders ignore seasonality in trading futures. Although much

has been written about seasonal trading, few traders have the patience to wait for seasonal windows to open a better opportunity. Seasonal trading has the advantage of commercial power. The strong hands in the market are totally aware of seasonality. In fact, in many cases their actions are the primary factor behind a seasonal trade. Prior to a harvest, commercial interests have a compelling reason to attempt to push down the prices of a COIDIIJOdity in order to be able to buy for less. As a general rule, commercial interests are more powerful than are producers. Producers tend to be smaller and weaker than the commercials who buy their output What individual or corporate fanner can compete financially with a company the size of some of the major food processors in the US, Canada, or Europe? Under normal circumstances, their actions, especially in commercially dominated markets such as cocoa and coffee, ·tend to depress prices for a period of time. That period of time, in part, gives

rise to the seasonality in a particular commodity market. 168 When the commercial interests decide to buy, that, too, gives rise in part to seasonality in the markets. Governments, with their various agricultural policies, can affect seasonality in various commodity markets. Governments tend to try to dissipate seasonality By encouraging massive storage programs, governments try to even out the supply of commodities. Government subsidies and protective tariffs also tend to modify the seasonality normally extant in commodities. Perhaps the first government intervention of this sort 1s recorded in Bible The patriarch Joseph stored grains for seven years having been apprised of a coming famine that would last equally as long. Cartels, such as OPEC and the Cocoa and Coffee Cartels, are an attempt by producers to control the prices of commodity markets and offset the effects of commercial domination. Very often these cartels are also formed to offset the effects of government policies The

greatest overriding factor involved in seasonality is that of weather. Weather conditions can overwhelm even the largest commercial interests, producer cartels, or governments. Generally speaking, I like the idea that when I am shorting a market, the major interests, the strong hands in the market, are busily depressing prices. Conversely, I feel a lot better about buying a market when these same interests are eager to buy a particular commodity. Just as there are times when the strong hands are busy depressing prices, there are periods in which the strong hands traditionally drive prices up. Once they have completed their purchases of a commodity at the lowest prices possible, having driven out the weak hands in a market, it is in their best interests to drive prices up. They love to do this at times when demand is the greatest. There are seasonal tendencies in demand as well as in supply Seasonal trading has the advantage of professionalism. The wise traders in the market are the

ones aware of seasonal tendencies Their actions tend to aid my cause in trading. Funds, large pools, and institutional traders rush in and out of markets, greedily eager to grab off some quick profits. Their trading tends to be mechanical, based upon some mathematical model or computerized trading system. Much noise in the 169 markets is created by the charging in and out of a myriad of daytraders. Such trading is often W1wise, as is evidenced by the horrendous mortality rate among such traders. The institutional traders, the large pools of money, etc, pay little attention to seasonality, lacking both patience and wisdom. before entry entails some work. It involves some research It means you will have to exert some effort to find out at least a small amount of fundamental information about the vehicle that W1derlies the futures contract you are about to enter. Some traders would consider having to perform this kind of work to be a disadvantage. It is exactly the opposite among

the commercial interests, the cartels, and the large traders. They have the wisdom of many years They are totally aware of seasonal tendencies and they often have the power to move markets. They can do it despite the noise created by those who foolishly jump in and out of markets in a frenzied, greed-driven manner of trading. Even in those markets that appear quite erratic due to constant in-and-out trading, the undercurrent of the wise traders can be followed. They are the ones who create and maintain the trends in the markets, they are the ones who know where a particular market is going, and they are the ones, the strong hands, who can take it there. To properly trade seasonal futures involves the expense of discovering which trades are seasonal. My opinion is that these are best discovered through the use of a commercial service or advisory A trader earns money by trading so that he can pay for research. The major research into seasonal trades is best left to specialists who have

the facilities for ongoing exploration of such trades. The seasonal trader has the advantage of being in step with the wise and powerful traders. It is difficult to think of a stronger entry filter Over time, seasonal windows can shift, appear, and disappear. Shifts, appearances, and disappearances can be attributed to local or global shifts in supply and demand, changes in weather, and changes in economic and political policies of regions and nations. To some traders, the expense of discovering and keeping current on seasonality in futures is viewed as a disadvantage Sources of Seasonal Futures Information Disadvantages of Seasonal Futures The disadvantage of seasonal futures trading are many, but with proper management they can be overcome. It is not my purpose to scare anyone away from the trading of futures, but happy is the trader who knows and understands what one is up against when dealing in futures. In Part III of this course, I will be discussing some of the problems

encoW1tered. At that time, I will address only those disadvantages that are peculiar to seasonal futures. The various exchanges publish information about seasonality in the outright futures. Generally this material can be obtained at nominal cost and in many instances is free. There are also some excellent commercial sources for seasonal futures trades. Such trades are discovered by computer analysis, and the sources are listed in Appendix C of this course. The main disadvantage to trading seasonal futures is that of being mislead or misinformed about the need for additional filters. Seasonal futures trades do not stand on their own strength. They must be filtered beyond the fact of seasonality Such filters can be fundamental in nature, technical in nature, or both, but they must be put in place in order to increase the expectation of success. Im happy to say that providers of information on seasonal futures warn against blindly taking seasonal entries. If a commodity is trading in

a seasonal window that calls for a trader to sell, and that commodity is in short supply, then it would be the height of foolishness to attempt a short position in such a market. Understanding the condition of a market 170 171 Chapter 18 Seasonal Futures Market Selection Although seasonal futures traders have many disadvantages from which seasonal spread traders find themselves considerably protected, there is still reason to enter outright seasonal futures trades. The effect of seasonality is so considerable that, in my opinion, it ought to be one of the primary considerations for any position trade in outright futures. Market selection in seasonal futures is somewhat more complicated than it is in seasonal spread selection. This is because seasonal futures trading lacks many of the advantages of seasonal spread trading. Stop running, which is not a factor with seasonal spreads, is a serious factor with seasonal futures. To a large extent seasonal spread trading avoids

volatility in the market place. Not so with seasonal futures Seasonal futures trades are fully exposed to volatility Seasonal spreads have the advantage of being largely unresponsive to the direction of the trend in outright futures. This is not true of seasonal futures trades Seasonal futures trades will suffer greatly when the underlying market trends against the traders position. While seasonal spreads are mostly immune to explosions and collapses in the underlying futures, seasonal futures positions are much more vulnerable to explosive events and can be devastated by explosions and collapses. 172 173. Liquidity looms much more important with seasonal futures trading than with seasonal spread trading, as does treachery in markets that are controlled by a few traders, which I call "Old Boy" markets. Com, Chicago Wheat, Soybeans, Kansas City Wheat, Soybean Oil. Whereas I would consider a seasonal spread trade in Orange Juice to be viable, I would refuse to take an

outright trade in such a treacherous market no matter what the potential profits might seem to be. While I might enter a trade in the TED Spread, I would never take an outright position in T-Bills because they are much too thin and illiquid. With the exception of highly unusual circumstances, I will not trade outright seasonal futures in Feeder Cattle, Coffee, Copper, Heating Oil, or Unleaded Gas. I refuse to trade Cotton even when it is not thin because of the treachery that takes place among the "good old boys" in the Cotton Pit Such markets as Feeder Cattle, Lumber, Value Line, Canadian Dollars, Pork Bellies, and often Coffee are much too thin to trade and should be left to those having a commercial interest. Trades in Cocoa may at times be acceptable US Treasury Bonds, Ten Year Treasury Notes, Eurodollars. Financial: Meat: Live Cattle and Live Hogs (be careful with the Hogs). Metal: Gold, Silver. I know that some of my readers will say, "Why did you leave out

Platinum futures, or whats wrong with trading Heating Oil contracts? My answer is that I can only indicate to you those markets in which I would personally consider seasonal trades. You may not agree with my choices You may have a favorite market not mentioned in my list. You may have a commercial or hedgers interest in a market not discussed here. Certainly, you should choose to trade in those markets in which you are the most comfortable. It is generally preferable to select markets in which you have knowledge and a genuine interest. In any case, there are plenty of markets in which to trade outright seasonal futures: Currencies: D-Mark, J-Yen, S-Franc, and occasionally B-Pound. B-Pound can be thin at times Energy: Crude Oil, and hopefully, Natural Gas. Grain: 174 175 Chapter 19 Seasonal Futures Trade Selection Seasonal futures trades require a filtering process, as do trades in seasonal spreads. The filtering process is a bit more difficult for seasonal futures than for

seasonal spreads. Outright Seasonal Futures: The Filtering Process Here is my filtering process: I check to see if there is any fundamental reason for the seasonal futures to behave abnormally. I want to know if there is any news or market situation that would affect the seasonal tendencies of the trade Im about to enter; drought, flood, shortages, oversupply, governmental decisions, political situations, etc,. In short, 1 want to know about anything that might affect the market and my proposed trade. I enter a proven seasonal futures trade during a time window covering ten trading days prior through ten trading days subsequent to the usual entry date for the trade, a total time window of twenty trading days in all. 176 177· I e~ter the trade based upon a signal from a simple chart pattern. If such a signal do es not appear, I refrain from entering the trade regardless of the probability of success. If I miss a good trade because of a failure of the chart pattern to apperu:, I

consider that this was not my trade. The chart patterns are detailed m Appendix A. As discussed previously, ~ith the advent of computerized selection of seasonal futures trades and with that info?11at1on so readily available, I no longer go through the process of trymg to memonze them. My time as a trader is far too valuable for me to pore over anc,~nt tradmg history looking for seasonal futures trades. For a ~mall sum, I can obtarn more opportirnities than I would find by manually researchmg these types of trades. It is also necessary to check the fundamentals when trad.ing seasonally with outright futures. Rather than ask you to re-read Chapter 5, Im going to include a modified version of its content m the next chapter. Chapter 20 Outright Seasonal Futures: Checking the Fundamentals The first step of my filtering process is to check everything I can about the general fundamentals of the underlying futures contracts relative to the time of year I propose making my entry. For me

this means looking at the most basic of fundamentals that are readily available. Ive written elsewhere that as an individual trader I cannot hope to compete with the large commercial interests in gathering fundamentals. That statement remains true today The large commercials can afford to have agents worldwide who can go out in the fields and examine crops, research intended plantings and actual plantings, pore over government and private reports of crop conditions, weather, soil conditions, insect infestations, etc. However, there is certain fundamental information available to the ind.ividual trader and, in fact, with the news reports available via a data feed, there is more information than I can possibly handle or want to know. Seasonal Futures: Checking the Weather It doesnt take a great deal of effort to turn on the news and find out the weather, not only in ones own country, but worldwide. 178 179 If there is flooding or drought in the Midwest that will affect the grains,

it doesnt take much effort to find out about it. If there is a freeze in Brazil that could affect coffee or soybeans, it doesnt take a lot ofresearch to be informed about that either. I can quite easily find out if the silver miners in Mexico are threatening a strike. If there is trouble in South Africa that might affect the mining of gold or platinum, it will be part of the news. If OPEC is planning a meeting, energy prices are likely to be affected, and its not difficult to find out. The news will carry tales of unrest in the Ivory Coast that might affect the supply of cocoa beans, etc. The point I am making is as old as the hills, "LOOK BEFORE YOU LEAP." This point is in keeping with my old adage, "Trade what you see, not what you think." Any oddity in the weather is going to cause me to take a hard look at a proposed seasonal futures trade in a commodity that is eaten by someone or some thing. I am going to see if the underlying markets appear at all normal

individually and relative to each other. Depending upon what I find, I may even consider entering a seasonal futures trade opposite to the way in which it was intended to be traded. Im also going to look for the next item Seasonal Futures: Checking for Backwardation One of the easiest things to spot is the reversal of the natural order of prices. This reversal is known as "backwardation" and can be seen in any newspaper that features a section carrying futures prices. For all futures contracts except interest rate contracts, the normal carrying charges (insurance, storage, interest) cause prices in the later (back) months to be higher than prices in the nearer (front) months. However, when some change in the fundamentals occurs to cause excessive demand in the front months, the prices in the front months may rise higher than those of some of the back months, causing backwardation. Backwardation is caused when someone is willing to pay a premium today to get something that

they fear may be much more costly later on. If I see backwardation in anything but interest rate futures (where it is normal for contract prices in the front months to be higher), I am immediately alerted to the fact that a normal seasonal futures trade may not be profitable. In fact, such a condition may cause me to consider going opposite to the seasonal tendency. 180 Backwardation in the interest rate contracts is the opposite of that in the commo dities, the back months become higher in price than the front months. Backwardatton there will cause me to be alerted to potential problems. Suppose I had a seasonal trade calling for shorting January Soybeans future s. I would want to see a normal progression in prices from lower front months to higher back months because this would be the normal progression for Soybeans. Lets now look to see if there is any backwardation in my supposed Soybean futures trade. SOYBEAN FUTURES PRICES January 6791/2 March May July 688 1/4 692 1/2 693

The progression from low to high prices is normal !or ~oybean price~. If there is also a normal condition in open interest, I would be mclined to take this trade. The only remaining factors would then be an entry based upon an appropriate chart signal within the seasonal window. Seasonal Futures: Checking the Position of Commercials and Large Traders There are two sources I can look at to see the position of the major players in the markets: I. The exchange issued "Position of Large Traders Report" 2. The open interest of Put and Call options on futures The normal position of commercial and large traders is to be short the various commodity markets and long the interest bearing financial fu~es. What I am concem~d with is if the "big guys" decide to get long commodity futures (short financial futures). 1s1 · This situation may or may not occur in conjunction with backwardation. Getting long commodity futures means the big guys are buying futures or selling Put

options. Getting long interest rates means getting short financial futures. To do this, the big guys are selling financial futures and selling Call options. If a major shift in open interest does occur, I will reconsider any proposed seasonal futures trades and, again, may even consider a reverse futures entry. The Position of Large Traders Report This report is issued once a month by the exchanges. It is not a timely report and is issued two weeks after the data are known. It becomes increasingly less reliable as time passes and the next report is due. I find that for purposes of seasonal futures trading, this report is not quite adequate. The Position of Large Traders Report is available by calling the exchanges, and is generally available from data services that carry news reports. Put and Call Open Interest ®iliCIJDilMlild#ii 5 1.lil Iii .12 Iii +.0900 +0.0000 ···:Hs0 ""i:0000 .1251!1 .1250 ~ .?500 1.001!11!1 ~ · ·7:2s0e 4. ?500 5.51i100 ~ . 24:

500 1?.?50 19.000 ~ :?Sa . si 39.500 ""10:750 ® 2 2 51.000 64.500 64.500 A current view of the position of commercial and large trader interests can be ascertained by looking at the Put and Call open interest in options for the individual contract that is going to be included in the seasonal futures trade. The reason for checking this factor is that the large traders and commercials are the parties who write and sell most of the available options in any market. Put and Call open interest by month is not generally available in newspapers. As far as I know, it must be obt~ed commercially from data services that carry the daily reported figures. Availability probably includes every live and end-of-day data service because the exchanges release open interest by contract along with volume and prices on a daily basis. (By the way, futures and options volume and open interest figures are always reported a day late) 12-15 12-15 12-15 12-15 12-15 Im interested in the

numbers Ive circled. Those represent the amount of open interest for, in this case, Soybean Puts at the strike prices shown at the top of the column. Im going to show you what I see and what I look for on my computer screen. 182 12-15 183 IIIGH LOU OlEH UOLUME OPEH INT. TICK UOI,. TICK TIME ···:i2sa ··i:0000 · ·,:2s00 ··2-i:sn ··si:1s0 ··,a:1s0 .1258 .7588 4.7588 17.750 39.508 .1258 ~ 1.8888 ~ 5.5808 9 ~ 19.1!108 36 4845 51.01!18 5 68 64.500 64.588 2 2 The Call open interest for those three strikes (700, 725, and 750) totals 23,367 showing that the commercial interests in Soybeans are not overwhelmingly short. If they were, I would have expected them to write many more Calls. Call open interest exceeds Put open interest by only a small amount This may indicate that the commercials are neutral or are themselves long this market. 111111 J~J~i.SFC";~~~iSFC"/ZS~I···:,Hsi ··,2:sa ~~ IIIGII S2IK HIGH S::111( J.01 1,0/ OPEN UOJ.IIME EX.

DATE OlEH IHI. 54.588 62.588 ··i1:sn ··ia:s00 12 .lil00 30.881!1 36.508 149 2 6241 1924 16.000 867 7279 :. ~s,·~ .i S1~j :i. ~ • ~ , ,:i. • , ~ ,lffl11 : : With Soybean futures ati579, and prices generally rising, Put open interest for the first three strikes below the market (625, 650, and 675) totals 22,222 contracts. .5001!1 .751!18 ~ IJID 111D SIZE OSH. ASI< SIZE s21rn 521/I< EX. 12-15 12-15 12-15 12-15 12-15 This is not the normal condition I would expect for Soybean futures. I would now be alert to the possibility of an inverted seasonal trade. I would feel unable to proceed with the trade based upon the factor of options open interest even if everything else were correct. As it turned out in actual practice, Soybeans continued to rise higher for some time due to an unusual demand for them. Had you not looked at any fundamentals, the lack of an excess of Calls over Puts in this market was sufficient reason for you to seek

additional information on the fundamentals of Soybeans. Now lets look at the open interest for the three strikes above the market on the January Soybean Calls. 184 . -.m- TICK UOJ,. TICK TIME Supposing I had the same seasonal trade discussed under the topic of backwardation. Th~ trad~ was to get short the January contract for Soybean futures on a seasonal ?as1s S~ce I found that the normal progression for prices was in effect, and assumm~ there 1~ ~o news ~at would prevent me from taking this trade, I would then begm examuung the opttons open interest for Soybeans. First I would look at ~e open interest of the near and at-the-money strike prices in the January Soybeans. Smee the commercials are usually short Soybeans, the normal position for them to be in the options would be to be short Calls, or short futures. For the market to be no~al, there should be significantly more Call open interest than Put open interest. If ~s were not the case, I would be alerted that there may be

something abnormal gomg on, perhaps something I have not picked up from the news. It may mean that I have to dig further into the fundamentals of the Soybean market. j . 80 +.881!11!1 185 Chapter 21 Seasonal Futures: Time Window Seasonal futures trades work best from a window in time. Computer generated seasonals offer an optimized entry date and an optimized exit date I have found, and the providers of such dates state, that you shouldnt enter a trade based solely upon optimized dates. That is why I use a time window of twenty trading days based around an optimized entry date. Of course, sometimes I miss good trades that fall in line before or after my preferred window. I assume these trades were not meant for me and look elsewhere for opportunities Sometimes the optimized seasonal dates produce better results than my seasonal window, but most times, my seasonal window produces the better results. Thats why I continue to use them. The results using rny entry window are

similar to those for seasonal spread trades. The following comparison charts will show you that sometimes the optimized dates are better and sometimes my own window is better. 186 187 ly unA trade to get short November Soybeans on 7/17 and exit on 8/8 was previous all last not does tendency seasonal this known to me. As you can see by the dates, 15 of out 13 in worked having as trade this reports that long. Yet Moores research years for an 86% accuracy rating. On the optimized entry date, BBs were moving apart showin1 the increase? volatility in the Soybean market. Both the upper BB and movm1 average lines were clearly in an uptrend. &88.00 &?5.00 &?0.00 £,£,5.00 660.00 &55.00 &50.00 o-., iI 7~7 ., I II /h 3 lr l j 1/J I 1. , ,, / ) j IJili/ ltt·rfl II I ll 11 Iii I11111 II IIIii IIIIII1111l111111 I I 1111111AugIi 1/11, 1III II II1, 1111 Sep Oct 1, I1111 1111111 I111 11 Jul Jft II / I! I Optimized &15.00 6?&.00 &?2,00

&&8.00 6&4.00 660.00 &5&.00 &52.00 &311.00 &25.00 620.00 &15.00 &10.00 &05.00 &18.00 644.00 &40.00 63&.00 &32.00 628.00 624.00 &20.00 61&,00 612.00 &08.00 604.00 &00.00 596.00 592.00 588.00 584.00 d It would have been diffi~ult to come up with a better entry date than the optimize a of less in resulted have would pattern chart the entry date for this trade. Following have could date exit d optimize the way only The exit. gain and not quite as good an entry been better would have been if it came 3 days later than it did (8/1 I). The date to go short was the top of the market at that time. on As long as I get my piece out of the middle, Im happy. But there is no question more made have would you this trade that had you taken the optimized entry date might money. However, that entry date does not take into account any filters that have not might trade the used, were filters which have been used. Depending

upon at entered been have not might trade the and trade, been as good as was the pattern all. For instance, look at the following chart: 188 &40.00 635.00 &00.00 595.00 590.00 585.00 580.00 5?5.00 5?0.00 5 - ----- 0------ 0---------------------------------------------------------------------Jul Aug Sep Oct A 14 bar RSI gave a sell sipal the day after the top was in place. Would you have been willing to enter on that signal alone without confirmation from BB? To me it looked as thouah prices were possibly goina to go hiaher, and that the inside day after the top was merely a pause for profit takin2 in the market. 189 0 CCU So you see its all a matter of perception. No one gets all the trades No one always can pick tops or bottoms There is no perfect way to trade 14.309 14.200 14.100 14.008 13.900 13.800 13.700 13.608 13.580 13.400 13.300 13.280 13.100 13.000 12.900 12.800 12.780 12.600 12.500 12.400 12.300 12.200 12.100 12.000 RSI and BB technical Heres

another seasonal futures trade. Again, it is short term, and one I would not have known about without its being computer generated. The trade has worked 13 out of 15 years, i.e, 86% accurate based upon the optimized entry and exit dates The trade calls for shorting September Cocoa. This trade calls for an optimized enby date of 7124 and with an optimized exit on 8117. The chart pattern gavae no entry signal whatsoever and so a lot of agrravation, drawdown, and eventual loss was avoided t it iii i-1 11 ttf JJ}I{IltJ 1Jtrl Ht f 1 l tt 1Hj f en~ lt ji1iJt1 fHHr . !1lllj l~-· lj /1! 11lii1 j jl {l Optimized 3 1iJ11 j 1/J Jl} j I 1-(-Chart pattern entry I 1,1111 I, II11 II 11-nl I111 111 III Ii ii Iill 1111, never fulfilled I .1, 1I" ,1, Jun 1111 I 11111111, . Au!J Ju I 13.920 13.840 13.760 13.680 13.600 13.520 13.440 13.360 13.2B0 13.200 13.120 13.040 12.960 12.880 12.B00 12.720 12.640 12.560 12.480 12.400 12.320 12.240 12.160 12.080 All of the BB lines

are pointing down at this point. . I I" 11 I I " Ml I,, I 1111,, I Apr 0 J~~I I11, 1IIII11 II11 I11 ~J! I 1 1111111 II II ------------------ --------------------- ---------------------------------------------- Sep This trade never fulfilled any chart pattern and so no trade was made. However, in this case no trade was better than a trade taken from the combination of Bollinger Bands and RSI. 14 bar RSI 0 ----------- Apr Unfortunately, these technical indicators, BB and RSI, gave an even worse signal than did the optimized entry date. You can see what happened on the next page 190 ay May Jun Jul RSI, having crossed the 50% line, is heading down. It is not yet" oversold" 191 The third trade Im going to show in this chapter involves another trade I would not have known about without the benefit of computer optimized seasonality. SFU 89.208 B8.889 This trade calls

for buying the September Swiss Franc on July 31, and selling it on August 22. This trade has 80% accuracy and has worked 12 out of 15 years 88.100 ea.eee 87.680 87.288 86.SBB 86.188 SFU .8950 .8908 .8850 .8800 .8750 .8700 .8650 .8600 .8550 BBs remained flat and gave no sipial during; the 10 days prior to the optimized entry date. .8500 .8150 .B400 .8350 86.000 85.688 85.208 81.880 81.188 81.000 83.608 83.200 J i Jt lJ /111 ~ .8300 .8250 .8200 .B158 .B100 •Note: The nmnber 3 exit date point of the pattern comes 10 days prior to the optimized exit date. llill1llll11,,, 111,ll11ll1ll!11l11llll1Sep 11lll11,,d111l111l111lAug . Ju,j1 " 111l11111 Jul .8050 .8008 .?$0 .?900 11 l11d111l111/111,ll1,11illi11l1 i ,, . ,,, ,II 11, 111111/l/11, .•Jun Aug Jul Ii 111111111111 . , .7850 .7800 Sep ------- 0--------------------------------------- Can you see that the pa~m entry, if made at the exact prices shown by the arrows, would have resulted in a breakeven or

small loss? The optimized entry date would have gotten you into this trade the day before the high of the Trading Range was made, and the optimized exit date resulted in a disastrous trade. In this case, the best trade signal of all was given by the Bollinger Bands and the 14 Bar RSI. Because neither one of them gave any kind of a signal at all, you would not have entered the trade. I have shown how the market looked during the entire 20 day window up until contract expiration. -------J~ ;-------- ------Ju l Aug 14 bar RSI chopped alon11 the 50% line during the same period and most certainly did not pe a buy signal. 192 193 Sep 82.880 82.100 82.080 81.608 81.208 80.800 B0.108 80.000 ~!~;:apte~!t tried to sho". you that there are no perfect methods for filtering . oveI. or my own trading has been chart pattern entries ln ll~e nextB chdapter Im going to show you how to use chart patterns coupled with B o mger an s. Chapter22 Trading Seasonal Futures with Chart Patterns

and Bollinger Bands As we begin this chapter, I want to remind you that the techniques I show here are equally applicable to the trading of seasonal spread charts. I have had much success using chart patterns in conjunction with Bollinger Bands. The bands are used to enhance what I see in the chart patterns and not the other way around In other words, the chart patterns are able to stand on their own, but the bands are used to provide infonnation I am unable to see in the chart patterns themselves. The Bollinger Bands are not able to be used in and of themselves for entry and exit signals. There must be a filter, non-correlated to the greatest degree possible. Why Use Bollinger Bands with Chart Patterns? Bollinger Bands are an excellent measure of volatility. They are closely related to the volatility measurements used in options trading models, where volatility is considered to be of utmost importance. In truth, an options model is only as accurate as its ability to accurately

compute true historical volatility. Bollinger bands come as close as anything Ive ever seen to accurately giving a pictorial view of historical volatility. Bollinger bands offer a way to see a statistical measurement that would otherwise be quite difficult to ascertain in any other manner. That measurement is the location of two standard deviations. 194 195 toward they will often bounce off of those bands and head back across the channel the opposite band. Why is this important? mately 96% of Two standar d deviations give an excellent profile of where approxi measure two you if that dictate statistics Pure d containe the price action will be see containwill you close, the of average moving bar 20 a from ns standar d deviatio nce to a ment of 96% of those closes. This represents knowledge of major significa trader. is coupled If a chart pattern yielding 65% accuracy in being correct for entry signals techentry an then close, the at action price with an indicator containing 96% of

the method a yield should Bands r Bollinge the and nique based upon the chart pattern If a chart patthat is 62.4% (96% x 65%) accurate in calling tradable entry signals with an signals pattern chart those coupling then time, the of tern is accurat e 80% 76.8% (96% x indicati on from the Bollinger Bands should offer a method that is 80%) accurat e in providing a good entry signal. what you do Of course entry signals represent only a small part of trading. It is and person~! s, busines money, risk, once you ~e in the trade that counts. It is trade, prop~rly 1s Exiting activity. traders a of manage ment that should make up the bulk with the done be can Entry entry. at do can one far more important than anything d man~ge pr??erly is trade the. ~f board. dart a at flip of a coin or by throwing a dart signal entry lity probabi high a if than greater far are win a for thereaft er, the chances most traders is coupled with a poorly managed, poorly exited trade. Unfortunately, thoroughly and

spend the majority of their time looking for the perfect entry signal, c~ make ~ey if neglect all other matters of management on the mistaken idea that wm. to fail cannot they the perfect entry, everything else will work itself out and In my opinion, Bolling er Bands are also useful as an overbought/~ve~sold indicator. g to measure purportm r mdicato other any as they are every bit as accurate picture of accurate an give rs indicato sold ght/over overbought/oversold. Overbou bemarket a Once s. sideway moving is market a when only n this so-called conditio the for gins to trend, they are virtually worthless as far as being acc~rate wobble s1mpI;,overbought/oversold condition. As a market trends, these rndicators readmgs until along in the overbought or oversold area, continuously g iving false such time as the market begins to move sideways once agam. a market is Bolling er Bands also give excellent overbought/oversold signals when bands, lower or upper the h approac prices As

Range. moving sideways in a Trading 196 offering a When a market begins to trend, eventually the bands will begin to trend, e from availabl is far better indication of what is taking place than section, this in charts overbought/oversold oscillators. As we go through the various a hugging prices see you When you will see the validity of what Im writing here. trend. a in are you know you , Bollinger Band, and the Band is trending um. They However, Bollinger Bands do not offer a very accurate picture of moment awhile, for s sideway moving been has market a When that. for e are far too sensitiv This other. almost any sizable move will send prices scurrying from one band to the ofQuite RSI. with situation was seen in the chapter on combining Bollinger Bands RSI while other, the to ten, prices seemingly rushed from one side of the channel the inaccufailed to confirm what appeared to be great momentum. The reason for s market, sideway a in that is um moment racy of Bollinger Bands to

properly record moving a from n deviatio major a show to going is any sizable one day price move average of price moves. are extremely This brings me to a final adantage of using Bollinger Bands. They respond relawill sensitive to sizable one-day price moves. This means the bands When proptrend. a of tively quickly to the beginning of a trend, or to the ending excellent an obtain can trader a , erly assessed in conjunction with chart patterns visualization of what is happening in a market. come to rely Over the years, the more I have used Bollinger Bands, the more I have . I use observe I markets the of picture in-depth more and on them for a broader on them used them on daily, weekly, and monthly charts. In recent years I have Pound. British and long-term charts to pick up major moves in Gold, Eurodollars, However, none of those were seasonal trades. be showing Since this is a course on seasonal trading, the situations and charts I will me since I for filter major a been has lity

pertain strictly to seasonal trades. Seasona are not you if even that aware be r, Howeve ago. began trading almost four decades on inused be can They valid. still are es techniqu these filter, a using seasonality as traday charts as well as weekly and monthly charts. use on weekly Seasonality is not really a factor on intraday charts, and it has limited benefits of the forego to and monthly charts. When trading those, I generally have seasonality. 197 chapter are not Understand, also, that the series of trades that are illustrated in this I have not inmethod. this with trading of " "magic the with meant to impress you In my trading cluded here a bunch of spectac ular trades with which to impress you. Jiving from my make to try I career, the vast majority of trades have been mundane. . markets day to day the the day to day trading that occurs in score. They I know professional traders who have never made the really "big" realizing that get, can they what of piece

dont have time for that. They take their lose. didnt they means it because victory a is win even the smallest Each is designed Each trade included in this chapter is designed to teach a lesson. points to make. more to bring home to you the things I look for. Each has one or you will see that also, hope, All of these trades exhibit the exercise of discipline. I letter from a received recently I that consistency is the key to successful trading. great thrill a me gives it because you, for one of my students which I will print here . business tough this in it making finally is every time I hear from a student who h time and it seemed "Dear Joe, I have just finished reading Trading Is a Business for the umpteent therein. contained insights the for you thank and write to te appropria month in that time. They "I have been trading consistently since May and have never had a losing have not all been brilliant successes, mind you! less important that the con"It has taken a while,

but it finally dawned on me that the patterns are greater probability of suca have s technique the s condition right the In text in which they occur. (S&P) with no more than market trending cess. As a result I am able to take entries in a strongly because rt works. care not do I but crazy, am I that think friends my of Some six ticks at risk. g an entry. Inwindow the chart pattern, and the Bollinger Bands are all signalin ~oweve r, move. a of n inceptio very the at be rarely will variably. such entry signals ge~g your such signals will pick up major moves in the markets. Ve~ often, piece of a large a piece of a major move may turn out to be worth more than gettrng lesser move. which you find It is up to you as an individual trader to work out those levels in who need traders are There same. the all not yoursel f most comfortable. We are there are , extreme other the At floor. trading the on and thrive on the action down a Eurohave I chart~. monthly from trade dly contente and

traders who quite happily S&P 500 the vta long usly contrnuo being pleased quite was who pean student with him. monthly chart for a period extending over 5 years the last tnne I spoke and others are Some traders have a tendenc y towards great caution in their trading roll." a "on are they ready to throw caution to the winds if they feel entry formation The entry method under discussi on in this chapt~r ~equires that an of a s~asonal frame tune the within place takes Bands confinn ed by the Bollinger patient enthe have not do you If . frequent be not will nces occurre window . Such premethods durance to wait for these, then you will need to use one of the other sented in this course. appre ciate the I present this method here because there are mature traders ~ho wait for the to willing are who and filter greater potentia l of this type of trading greater certaint y of the move. s with the hope that "Also, I have performed exhaustive back testing of different exit

technique produced differThey d? discovere I what know You one would prove to be better than the rest. as to make little differsimilar so were results the overall but basis, trade by trade a on ent results ence. Then the light came on The key is be consistent!" heart. And now Dear readers of this book, please take the preceding comments to onward and upward. Why Not to Use Bollinger Bands With Chart Patterns of chart If you are the type of trader who requires lots of action, the combination may You you. for filter a of much too patterns and Bollinger Bands may provide l seasona the which in s situation see to like would have to wait longer than you 198 Bollinger Bands: A Wheat Trade report. I The following trade surprise d me when I read about it in Moore s research e31:ly fall or am used to selling Decemb er Wheat on a seasonal basis in late summer m late Wheat March ing of the year. Howeve r, Moore s report calls for purchas 199 in 13 September. I was previously unaware of

this trade However, it has worked dates. exit and entry d optimize the upon of 15 years for an 86% accuracy based WH Optimized entry d The proposed seasonal entry is on a takeout of this WH 500.00 195.00 190.00 185.00 180.00 475.00 170.00 465.00 460.00 455.00 450.00 415.00 140.00 435,00 130.00 125.00 120.00 415.00 110.00 405.00 400.00 395.00 390.00 385.00 every Beginning with the intermediate low, I count a 1-2-3 fonnation. Thereafter, low s ent retracem previous the than low newer a retracement that does not create date, entry d optimize the to prior days ten time, the results in a Ross Hook (Rh). At means I would nonnally enter on a breakout of the high of the most recent Rh. That shown one last the to prior just Rh the of breakout a on entry g I would be attemptin Now as the highest high on the chart. That signal is in and of itself a good signal Bands. r Bollinge lets see ifwe can gain any depth ofinfonnation from a look at the 200 l~f 508.00 495.00 490.00 485.00 488.00

475.00 470.00 465.00 460.00 455.00 450.00 445.00 440.00 135.00 430,00 425.00 420.00 415.00 410.00 405.00 400.00 395.00 390.00 385.00 proThe Bollinger Bands are indicating an uptrend ~ progre~s at the time of ~e ~e Prices uptrend. an m ~e Imes three ~l posed chart pattern entry. Notice ~t V?latl!channel. upper the m y constantl g remamm and hugging the upper band line m ity is also confirming the .uptrend When the Bol~ge r B~~ ~e bo~ trending moderof e mdicativ 1s 1t distance, same the relatively at stay and direction the same ate volatility, exactly what should be found in a strongly trending market. The Bollinger Bands are in every way confirming an entry at the breakou t of the Rh. the Had a choice been made to enter this trade based upon the optimized entry date, es themselv of and in although uptrend, the g confirmin Bollinger Bands were still signal. buy they are not giving a 201 · JYZ Bollinger Bands: A Yen Trade The next trad~ using chart patterns and Bollinger Bands

involves buying the Japanese Ye~. This trade has an 80% chance of success if held from the opf · d try date t l th . d d uruze en un 1 e o?tlmlZe exit ate. Those dates call for entry in the last week of September and exit m the third week of November. The trade has worked 12 of 15 years. Optimized entry date JYZ 1.2900 1.2750 1.2600 1.2450 1.2300 1.2150 1.2000 1.1850 1.1700 1.1550 1.1400 1.1250 1.1100 1.0950 1.0800 1.0650 1.0500 1.0350 1.0200 1.0050 .9900 .9750 .9600 .9450 At the time of the proposed entry date, a chart pattern is just beginning to form. It is not yet cl~ar whether or not a #3 point has been made. As much as ten davs prior to the op~zed entry date, there was no buy signal of any kind as the rr{arket was clearly m a downtrend. Now lets look at what the Bollinger Bands are telling us. 202 1 Jul 1.2900 1.2758 1.2600 1.2450 1.2308 1.2150 1.2000 1.1858 1.1700 1.1550 1.1408 1.1250 1.1100 1.0958 1.0800 1.0650 1.0500 1.0350 1.0200 1.0050 .9900 .9750 .9600 .9450

Aug········ . ············· Seplllll11ll1 Notice that the lower Bollinger Band has turned in. The two bands are coming together in a pincer-like movement This signifies decreasing volatility and is a hint that the market may begin to move sideways for awhile. The bands had been fairly constant in their distance apart, but recently they became somewhat volatile and are now narrowing The combination of these two factors having this kind of action is typical of at least a temporary market bottom. As you look back at the chart, you can see that virtually every sideways step in this market has been associated with bands displaying similar characteristics. The chart pattern is also revealing here. The extra long bars at the recent bottom are indicative of a change in momentum. This, too, occurs at market bottoms I would not trade a breakout of the #2 point unless I had much confirmation from the Bollinger Bands that an uptrend was soon to be in progress. Now lets look

to see if at any time during the 20 day entry window a buy signal occurred for this seasonal trade. 203 JYZ JYZ 1.2900 1.2750 1.2600 1.2150 1.2300 1.2150 1.2000 1.1650 1.1700 1.1550 End of time 1. 1100 1 .1250 window. 1.1100 1.0950 1.0800 1.0650 1.0500 1.0350 1.0200 1.0050 .9900 .9750 .9600 .9150 Jun ,,ii II 1111 II 11111111111 . Oct Sep Jul Optimized entry date Optimized May · .iui 1.2900 1.2750 1.2600 1.2150 1.2300 1.2150 1.2000 1.1850 1.1700 1.1550 1.1100 1.1250 1.1100 1.0950 1.0800 1.0650 1.0500 1.0350 1.0200 1.0050 .9900 .9750 .9600 .9150 I . , , ,,i1111111ll11111!1hlll1llllll11 Aug Sep Oct Aug chart pattern At no time during the 20 day window did a signal arise from either the Bands r Bollinge the or from anything visible from flat. The The bands have narrowe~ and at least the lower band has definitely gone moving average is flat as well. here. No trade has been possible based upon the technique for filtering used set out for this Let me show you one more

chart that takes us beyond the exit date as move into an they as Bands r trade. It will help you to see the action of the Bollinge Range. Trading d extende 204 the optimized Looking at the chart between the time of the optimized entry date and shown at time the exit date, we can see an ever decreasing amount of volatility. By r Bollinge the and pattern, the end of the chart, we have never had an entry chart Bands are about as narrow as they can get. low and this When the Bollinger Bands become extremely narrow, volatility is very t from this breakou The y. volatilit of on expansi situation portends a soon-coming direction the predict to way no is There way. either go extended congestion could here. see we based upon what ed entry The seasonality of this trade failed to materialize. An entry on the optimiz The date. exit ed optimiz the of date would have produced a small loss by the time market. the of out us filters for this trade have worked well to keep 205 Bollinger Bands: A

Soybean Trade The next trade Im going to show you reveals what can happen when a trader flies in the face of not only his indicators, but the fundamentals as well. It is a seasonal trade in Soybeans in a year when demand for all grains was much greater than supply. This condition was easily ascertained from even the most cursory scanning of agricultural news. The trade calls for selling November Soybeans during the second week in September and buying them back in the first week of October. Commercial interests are usually hammering down Soybean prices during this time period just ahead of the bulk of the US harvest. As mentioned previously, even the strongest interests cannot overcome the forces of supply and demand, weather, or any other real fundamental reason for a market to behave the way it does when such fundamentals truly exist. The Bollinger Bands confirm our conclusions. SX Optimized sx ,.,, o1,,,,,,,,,,,, ,,,l,,l,11,,,11,,1,,,,,,,,,,

,11ll1111l111,11l1l1111l1111l1111111l11,111!1l,111111l1l1il111ll111ll11111illll1l111 Apr May Jun Ju 1 Aug 664.00 668.00 656.00 652.00 648.00 644.00 640.00 63&.00 632.00 628.00 624.00 620.00 616.00 612.00 608.00 604.00 600.00 596.00 592.00 588.00 58i.00 580.00 576.00 572.00 Sep Chart patterns for this trade indicate a steady uptrend beginning with a 1-2-3 formation followed by a series of Ross Hooks. Certainly not a situation that lends itself to selling. Even as early as 10 days before the optimized entry date, there is no chart pattern indication to go short. 206 675.00 670.00 665.00 660.00 655.00 650.00 645.00 M0.00 635.00 630.00 625.00 620.00 615.00 610.00 605.00 600.00 595.00 590.00 585.00 580.00 575.00 570.00 565.00 560.00 ~11gli111l1111ll11l1l~~~l111l11 11,li111,Jl,,1i11l1l1111l1111l11J11111lui111l1l111111 ·····""""""" """""""" 11 un May Apr At all times during the initial 10 days of

the window, including ~e optimized entry date, all aspects of the Bollinger Bands are indic~tive o:t: a trend m progress. At the expense of being repetitive, both bands are trending, as 1s the mo~g average. 1?e upper and lower bands are remaining at appr?ximately rl:e same distance apart, mdicative of moderate volatility and a trend. Prices remam m the upper channel The market is trending. Add to this the fact that grains in related markets su~h as wheat and com were in short supply. These factors when taken together give a strong indication that seasonality is not in effect. 207 Bollinger Bands: A Swiss Franc Trade This next trade in the Swiss Franc is entered in mid August with an optimized entry date of 8/17. The trade calls for getting long December Swiss Francs almost one month prior to expiration. With that much time left, getting long December Swiss Francs would put you into a mighty thin market. I would prefer to enter long into the September contract and roll over into

the December contract at such time the trade warrants continuation and the Volume and Open Interest in December exceed that of September. In currency trades I am particularly interested in liquidity, and December does not offer that liquidity until much closer to first notice day. First notice day for the currencies takes place in mid September It is rare to get the benefit of an entire move. If we can manage to get "our piece" of the move I will be content. Lets see what happened SFU .9500 .!M00 .9300 .9200 .9100 SFU .9000 .B900 .8800 .8700 .8600 .8500 .B100 .8300 .9500 ,9180 ,9300 .9200 .9100 .9000 .8900 .8800 .B700 .B600 .B580 .B180 .B308 .B200 .B100 .B000 .7980 .7800 :nee .7600 .7500 .BZ00 .B180 .8000 .7900 .7800 .7700 . ·· · ·ni,y · ·" J~~·" I I I I I I Ii IIIIII11 .7600 .?500 .7180 .7300 .7200 III 1111111 III11, 11 I111 111 111 II I1, 11 I Jul Aug .7400 . • I May Jun I Ii I ii .7380 .7200 II I

II I I 111111 III ii I 11 I II I 11 I11 I11 I I I11 I 11 I Jul Aug From ten days prior to the optimized entry date, until that actual date, there were no entry signals based upon chart patterns. As you will soon see, the optimized entry date turned out to be just about the perfect time to have entered this trade. Before we can make any judgments, we need to see the entire trade, including whatever patterns might develop in conjunction with the Bollinger Bands. 208 Shortly after the optimized entry date a 1-2-3 low takes place on the chart pattern. If we so choose we can enter this seasonal trade on a breakout of the #2 pomt. B~t because we are :Uso filtering these trades with Bollinger Bands, we will have to wait witil some sort of confinnation comes from them. 209 s:ru .9050 .9000 .8950 .8900 .8850 .8880 .8750 tii7 The chJ patte~l has given a breakout entzy signal. May 11, 11 Iill l1I1111111111/l 11111 ,II i11111111 IllJul . Aug Jun IIii ii iii II .9500 .9100 .9300

.9200 .9100 .9000 .8900 .8800 .8700 .8600 .8500 .8100 .B300 .B200 .B100 .B000 .7900 .7800 .7700 .7600 .7500 .7100 .7300 .7200 the parameters We have ~ entry signal fr o~ ~e ~h~ pattern, but at this time all of Discipline for order. in is position short a g o~ the Bollin~er Bands are still md1catm a method use to going are we If market. the of out stay we that this method dictates tactics. our out carrying and strategy our with staying in nt consiste we need to be Not always , but often, patience has its reward. .8700 .8650 .8600 .B550 .B500 .8150 .8100 .B350 .8300 .B250 .8200 .8150 .B100 .B050 .B000 .7950 I II, illii iII 111 IIIII I III IIL1 ii III 111!11 IIii IAug .,II iIi III11111 Jul . " Jim .7900 Bands never During the 20 day window allotted for entering this trade, Bollinger Does move. the gave a confinning signal. We never managed to get our piece of and out run now must you that bother you? Does that disappoint you? Do you think change parameters so that you

do get an entry signal? , no! An optiHas much been missed by not getting into this trade? In my opinion on the chart shown bar last the to up points 118 d mized entry would have delivere witnessed shown) (not later days few A closed. is where my own 20 day window ended up have could exit panicky a and profit, paper that all of the disappearance with an actual loss. you one in Now, lets look at one more outright seasonal futures trade. I will show others do, , Copper in futures Copper. Although I personally do not trade outright and there is particular lesson I want you to see. 210 211 HGU Bollinger Bands: A Copper Trade At the. be~g of this chapter I said that only from time to time would a trade c~m~ m which an .entry pattern, confirmed by the Bollinger Bands, takes place within a seasonal WIDdow. Now lets look at this trade in September Copper so you can see for yourself that such things do happen. The trade called for entry at the end of the ~~t wee~ in June. The optimized

entry date for the year shown was 6/6, with an optnmzed eXIt date of7/25. Rh HGU 10 days 14100 1~50 13800 13650 13508 Optimized enhydate prior to the 13350 optimized 13200 date 13050 1Z908 12750 12600 12450 12300 12150 12000 11850 11708 11550 11400 11250 l,l1.ll11, ••D. i •• ll,,, l, ~ll ••• 1 1li • ,•• 111 1• ,,,1lill,1i1ll1 May Apr Mar Feb Jan ec 11100 10950 10800 10650 Immediately prior to the opening of the 20 day window, prices formed a 1-2-3 low and on th~ very day the window opened, prices thrust upward taking out the high of ~e #2 pomt of the 1-2-3 pattern. At that particular time the Bollinger Bands had Just reached a narrow flattening out indicating low volatility. We might say that all components of the bands were just about flat. 212 ••.•• , , 11 , , , ,, 11 , , , Ii ,111 ,1, ,ii ,1ll111111,lh M11.y Apr Mar Feb · Jan Dec 14100 13950 13800 13650 13500 13350 13200 13050 12900 12750 126110 12450 12300 12150 12000 11850

11700 11550 11400 11250 11100 18950 10800 10650 .1111illli 111111 Jun A second Ross Hook is formed on the very day of the optimized entry date. By this time, the Bollinger Bands are giving a strong entry signal. All three components have turned up. Prices remain in the upper channel and have been hugging the bands. The 20 bar moving average is indicating an uptrend, and the lower band has also turned the comer and is pointing up. If I traded Copper, I would enter this trade by attempting to get back into the longer term trend at the earliest practical moment that affords me the momentum of the market to help my cause. Any breaka out of the high of a correcting bar signals an entry into the trade. For example, the on shown one last the bar, ) (retracing breakout of the high of the correcting chart, should cause entry, because for prices to take out the high of that bar would be an indication that momentum is now back in the direction of the trend. Lets see what happened to the

remainder of this move. Did it work, or did it fall apart? Can a trader get a piece of the action? Will what is obtained have been worth the wait? 213 HGU HGU 141.00 110.00 139.00 138.00 137.00 136.00 135.00 131.00 133.00 132.00 131.00 Jan . ·"·r°eb· . Mar Apr .••• , ,1 ,, May 1,,,,,dl1,1,ll11l11illil 130.00 129.00 128.00 127.00 126.00 125.00 124.00 123.00 122.00 121.00 120.00 119.00 118.00 Mar Ap~· ,,, . , ,,,,, , ,J,,11,,,,,,,l,,111111~~1il11ih111lli May un Jun It turns out that it was possible to get a nice chunk of the move made in copper. Everyone has his own way of getting out of a trade. That is why I labeled the chart "exit this day or sooner." In my opinion, exit should have been made on that very day having given back less than most people. The reason I say that is because as soon as prices began making lower tops, in the way I trade I would have begun tightening my exit point by moving it closer to the price action. Of course,

this gets me stopped out more often than it does someone who is willing to keep his exit stop further back. But tightening the stop when I see a decent profit for a trade has worked for me and suits my comfort level. . nly the optum··zed dates this trade gave you a piece of E ven usmg the market. Ive o . b shown where I think I W ould have gotten out. I think that ecause each day that the y h e some market failed to move hi~er , I would have tight~ne~ :y !op. i;: works other way that is more smtable to your own s~ e o a g. . for you, then stay with it. Consistency is very important to your trading. If~~:~ Notice there was no signal from the Bollinger Bands thems elves. One more question comes to mind. What would have been the result had a trader stayed with the trade until the optimized exit date? Would he have done better? Worse? Won more money? Lost money? 214 141.00 140.00 139.00 138.00 137.00 136.00 135.00 134.00 133.00 132.00 131.00 130.00 129.00 128.00 127.00 126,00

125.00 124.00 123.00 122.00 121.00 120.00 119.00 118.00 215 PARTID REALITY TRADING 216 217 Chapter 23 Thinking and Trading Go Together So far in th.is course we have looked at a lot of definitions, rules, and techniques My intention has been to give you a realistic look at seasonal trading. In this section we need to look at the concept of"how to trade the trade." Entry technique is all well and good, but it is only a small part of trading. A much more important aspect of trading is that of having a strategy and then deploying the tactics that will fulfill the intent of that strategy. In other words, now that you re in the trade, what do you do next? Of course, the use of seasonality is part of our strategy and the main concept behind what weve been looking at, but what are the tactics we can use to keep losses small and maximize wins? What can be discerned from careful inspection of a chart as the trade progresses.! What problems might we nm into during the

course of a seasonal trade, etc? To bring these things to light I am going to look at some additional seasonal trades and at least one of the trades we looked at previously. We will in effect revisit them to see how we might have improved on them. We will use outright seasonal trades because we want the use of standard bar charts. Bar charts and outright seasonals reveal the kinds of problems we are likely to encounter, whereas line-type spread charts are not subject to such problems as stop running and the perception of many other traders. We will use any or all of the tools previously discussed, only this time we will be less mechanical and more interpretive. Were going to start looking at these charts the way a trader really should view them. We want to glean all the information we can as the trade runs its course We may bend a few rules or even 218 219 throw a few out, because real trading is that way. Thats why I have called this section of the course REALITY TRADING Do you

remember the trade from Chapter 21 in which we had a seasonal signal to get short November Soybeans on 7/17? Lets look at that market again, only this time well back up in time to show more of what immediately preceded the optimized entry date. However, a few days later, vhen the scare failed to materialize, Soybeans started inching back towards the former Trading Range. In fact, the gap up was qUic~y closed leaving an island reversal at the top of the chart. This represented a massive pattern failure, leaving the chart as you see it below. sx 661.00 660.00 656.00 652.00 618.00 61!.00 640.00 636.00 632.00 628.00 621.00 620.00 616.00 612.00 608.00 604.00 600.00 596.00 592.00 588.00 58!.00 580.00 576.00 572.00 sx r 664.00 660.00 656.00 652.00 61B.00 614.00 610.00 636.00 632.00 62B.00 621.00 620.00 616.00 612.00 608.00 601.00 600.00 596.00 592.00 58B.00 581.00 580.00 576.00 572.00 . ,,,, ,,,,,,,,,,,,,l,l,,l,11,,,1~,,1,,,,,,,,,, ,1,ll1111l1,1,1,l1l1111l1111l1111111l111l11 Apr May

Jun Ju I Although there was no way to have improved on the optimized entry date because it called the exact day of the top, the chart, without benefit of anything else, was saying, "think about getting short." From this picture we see that Soybean prices had been moving sideways in a major Trading Range just before the explosive breakout day. That breakout came in conjunction with a weather scare It could be seen in all the grains, but the one grain most affected by the news was the Soybeans, because the scare came at a time that is crucial to the growing cycle of Soybeans. The reality is that even with the knowledge of the failure, the trade would have been difficult ~o enter. Why" Because unless you had entered short during the few days of congestion following the failure, you would have been looking at a chart like the one at the top of the next page. 220 221 Contrarian Trading sx Il :Such a chart is indeed difficult to trade. The huae gap back into the

Tnuling Ranae would 1D1Derve most traders, leavin1 them cllllfused and wonderiniiwhat in the world was really iioinii on in this market. ltr rt The market spoke loudly and it did it seasonally but not everyone was able to hear it. ~ t, t ~ llr ~ ~ 664.110 660.08 656.00 652.00 648.08 644.08 640.00 636.110 632.08 628.00 624.00 620.00 &16.00 612.00 608.00 From time to time, it becomes clear that a particular market is not going to behave seasonally. What makes it clear? Unexpected backwardation, unusual weather, a known shortage, a strong trend in the direction opposite to which you would expect the market to be moving, a trending market at a time when you would normally expect prices to be in congestion, or congestion when you would normally expect a market to be trending. Obviously, this type of information precludes your being ignorant of the basic fundamentals of the market in which you are attempting to trade seasonally. At times, when it becomes clear to you that the

market is behaving abnormally, it may be practical to consider trading the opposite way because the changes in fundamentals preclude any hope of using a seasonal filter. 604.00 t Jl!h+f tifltl¼ll/ ¼t ~tl 600.110 596.00 592.00 588.00 584.00 In my experience there have been a number of years in which, for one reason or another, individual markets, entire complexes, and even the majority of market groups, failed to behave seasonally. 580.00 . , , ,, ,,,, , ,,, ,,i11111,,,,,l,l1111l111,l1111111l111111l1l11111!1 Feb Mar Apr Moy Jun Jul sx 576.00 572.00 Such behavior invariably can be explained by changes in the underlying fundamentals governing supply and demand. When it becomes clear that such is the case, the seasonal trader can choose to sit on the sidelines or trade on the knowledge that trading with a seasonal filter just isnt going to work. I believe that in such situations, the reasons for trading counter-seasonally are very strong. So strong, in fact, that the

probabilities for success are as great or greater than they would be for talcing a seasonal trade, and most certainly greater than for just entering a market based on ones opinion or a signal from some technical indicator. I mentioned earlier that there have been years in which the underlying fundamentals precluded any reasonable expectation of seasonality. In fact, an attempt to trade using a seasonal filter would be the height of foolishness Weve looked at a few counter-seasonal spreads earlier in the course. Now lets look at a very powerful counter-seasonal move in the grains. 222 The move to which I refer took place in the wheat market. At the beginning of the year, worldwide wheat reserves were lower than they had been in many years. The 223 . previou~ years wheat harvest h~d been lean, ~d the demand for wheat was quite strong, m part because of a surular shortage m the reserves of all grains. It was hoped that the wheat harvest would be plentiful, but for the second

consecutive year, the worldwide wheat harvest was poor in both quality and quantity. Sell September Wheat 2nd week in May, exit last week in May. Sell September Wheat 2nd week in May, exit last week in June. Sell September Wheat 2nd week in May, exi~ second week~ July. Sell September Wheat 3rd week in May, ex.it second week m July In such a year, would anyone expect wheat to behave seasonally? Of course not! Wheat gave a wonderful opportunity to be a seasonal contrarian. Lets look at a series of seasonal Wheat trades that call for selling Wheat futures to see what happened to those trades. Well look at seasonal short trades that were called for after it became known that the Wheat harvest was going to be poor for a second consecutive year. Along with the poor condition of the crop came the knowledge that wheat reserves were lower than they had been in 40 years. This knowledge became available in early March of the year. As you can see, all such trades failed miserably, yet the

p~a.r;;; trade wi~s 87 % o! the time and no trade of this type has done worse than wm 801/o of the time m l years. wz WU Exit 2nd week in July 46.000 15.500 45.000 11.500 41.000 43.500 43.000 42.500 42.000 11.500 41.000 10.500 40.000 39.500 39.000 38.500 38.000 37.500 37.000 36.500 36.000 35.500 35.000 31.500 ; , I,,, 111,111,, May I 11111 406.00 .[h,, December Wheat contract seasonal trade did not fare much better: On the next chart, you see it from a broader view. This was truly a demand driven market I I May I l I 1111 I 1 111 11 The first trade calls for selling September Wheat during the last week of April. Comc1dent with this trade were the following seasonally optimized trades: 224 490.00 4B3.00 176.00 469.00 162.00 455.00 448.00 441.00 434.00 427.00 120.00 413.00 225 111II111 11 Jul I I 11 399.00 392.00 385.00 378.00 371.00 364.00 357.00 350.00 343.00 336.00 329.00 wz Demand overcomes what would have been a normal Wheat top ,, 530.00 520.ee

518.08 500.88 490.08 :::: CZ 340.00 336.08 460.08 450.08 440.88 438.08 428.88 emand driven market 410 08 400.08 390.00 380.00 370.00 360.00 350.00 340.00 330.00 320.00 310.00 300.00 332.00 328.00 324.00 328.00 316.00 312.00 308.00 304.00 300.00 29£,.00 292.00 288.00 284.00 280.00 2?6.00 272.00 268.00 264.00 260.00 256.00 252.00 248.00 lllll111ll1ll111111111l11111l111l11l11l11lll111 ., ,, llhl101h11l1ll1!1lllil1dllllllhlllllllll1l111l11i11ll1l111l11111l1i11 Nou Oct Sep Aug Jul Jun Hay Apr Milr I mention ed earlier that sometimes the fundamentals underlying an entire complex be can cause a situation in which it is wiser to trade as a contrarian. The signal can year. same the for chart very strong indeed. Look at the Com are Would a thinking trader take such a seasonal trade? I dont think so! There to t importan is it why is That sense. times when every trader needs to use common the of ntals fundame basic most the of e knowledg a seasonal trader to have some his markets in

which he trades. Having such knowledge pays off handsomely By a made have could trader a markets, grain the driving demand the realization of great deal of money trading them. This is what reality trading is all about A similar situation was found in the Soybean market during the same period. 226 227. If you find that seasonals are not working well, or not working at all in a particular market, then you must find out if they have a reasonable chance of working out in related markets. This kind of thinking must be used in the grains, the Crude Oil complex, the currencies, the interest rate contracts, and the stock indices. It would be the height of folly to do otherwise. If any one member of a complex is not behaving normally, then look to see if the same thing is happening to the other members. Chapter24 If you notice that the Chicago Oat contract is not behaving seasonally, you need to look with great caution at Corn, Wheat, Soybeans, Soybean Oil and Soybean Meal. Conversely,

if you see that seasonally grain contracts are making tons of money, you can be pretty sure that grains are the very markets you should trade. If you see Crude Oil behaving seasonally, then you can be fairly sure that seasonal trades in Heating Oil and Unleaded Gas will also behave seasonally. Of course, other considerations may enter the picture that will serve to break the link between Crude Oil and the rest of the complex. A very severe winter can drive Heating Oil futures to new highs despite the fact that, seasonally, Crude Oil is behaving as one might expect. Bewar e of Stop Running One of the major differences between trading seasonal spreads and trading seasonal futures is that of stop running. The spreads, especially those that are put on one leg at a time, do not have that problem. A chief advantage of spreads is that no one but yourself need know that you are holding a particular position. However, this advantage is not available to the seasonal futures trader He is totally

exposed to the vagaries of stop running What Constitutes Stop Running? Stop running, or "stop fishing" as it is sometimes known, generally, but not necessarily, involves action by the locals on the floor. The "strong hands," in order to drive out the "weak hands" in the market, are also know to run stops. Such action is commonly known as a "squeeze. " The majority of locals are scalpers trading for only a few ticks. It is important for you to realize that when order flow into the pit dries up, markets do not trend nor do they exhibit very much movement. Trends do not originate among the locals on the floor. Typical action by the floor traders is that of trying to scalp out a few ticks from very short term price moves. The floor traders call this action "picking each others pockets." Real moves in the market invariably come from orders originating off the floor. This order flow from non-locals is generally referred to as

"paper." 228 229 It is paper that moves the market. Until paper comes into the market, it will not move much. Paper is what creates the bunching of orders that enables the locals to move a market from one J:!Oint to another. I can best show you this with a couple of pictures. l Ji lJ l lI Tl J 4i ~=: Assuming the open in Chicago as shown, we see that the market subsequently moved to the indicated high. At the high, some traders shorted the market Their stops will be located just above the morning high. That is where the : paper is. There is also paper below the market as stops would naturally •7088 accumulate below those points. THINKJ Where . 7078 Stops➔ 7076 wo~dl.,o~ put YOUR STOPl 7074 - - - - -- J--- -l --t il """" J I -ttlr j l open---;:-i. lI 15 minute D-Merkj I - (!-- lf 1111111 I 11 I iii I, . , ", ," " II, I,,,, ,11, ,, , , 37 8 911101 2 3 4 5 6 7 i .Stops 8 : If you are able to

watch the price action intra-day you will see that if stop fishing is taking place, you will generally see an extra long bar that takes out the stops, and then either reverses direction immediately or reverses direction on the very next bar. It looks like this: :; DM 5Minute .7084 t . ::::~== .7056 7054 .7052 lirllllli9 I1/1111I 10II 1111111. r· Larae : . I ·r Z 1 il1lJ l / 111tl Conversely, there are some buy stops above you, placed th~re by those who sho~ed the morning high. By the way, those fly-speck looking pnce bars are from trading on the very thin Globex Exchange during the Asian and European sessions. - - J- -- - -1 - Ii --t 11J1 .7078 .7076 .7074 .7072 .7070 .7068 .7066 .7064 .7062 1 .7040 7038 J I( . 1ir- If you were a local on tb e floor looking for only a few ticks to scalp for profit, where would you look first? 1111 ,ii ,ii .7082 .7080 htif t-~- .7060 .7058 .7056 rmmm1 =" b• ii,37. ,. , , ,11, I ·-~-•11, ,, 7 ,8 l1illl

9lli1l1 ll1l1i01ll 1111111l1 B 91110 12 .7054 .7052 .7050 .?048 .7046 .7044 .7042 .7040 .7038 You know there is paper (order tickets) just below you. That means if you sell, there are sell stops below you to guarantee that when you buy back you can unload your short position profitably. It remains only for you to determine your sell point This will probably be decided by the action you witness around you on the floor. To me it looks as though there would be more sell stops in the market than there would be buy stops. This is because most of the early action has been to the upside The buyers, since the open, have outnumbered the sellers, and therefore are protecting their long positions with sell stops. Interestingly, you will see the same price pattern on daily charts. As a ~easonal trader you are most interested in daily charts. So lets look at the same thing happening there 230 231 3 4 5 u The Importance of Second Time Through Stop running on the daily chart usually

involves a larger number of contracts because there is more time for paper to accumulate. That is why in Trading by the Minute I said that the taking out of yesterdays high or low was a major event for a daytrader. It is even more important when the highest high or lowest low of the last three days is taken out. In any case, the price action looks the same In light of the knowledge that bunched orders are going to be filled, how can you defend yourself against this kind of action 9 DM .7440 .7400 .7360 .7320 .7280 .7240 . 7200 .7160 .7120 .7080 .7040 .7000 .6960 .&320 .6880 .6840 .&800 .6760 .6720 .66B0 . 6610 .f,600 .6560 . 6520 . ji,i Stop running takes place simply because that is where the paper is. When a preponderance of orders are available at a certain price, it is just a matter of time until the market fills those orders. Lets face it, thats why markets exist The markets are there to fill orders. The more orders that can be filled in a market at popular

prices, the more that market is considered to be efficient. When orders are filled you have price discovery, and that is what fotures is all about, isnt it? Aug Youve seen it, what are you going to do about it? The answer to that question is to do the opposite of what we did with spreads where, in defending ourselves, we dropped one side. It is something Ive already introduced earlier in the course - we hedge. Remember, the markets were created for hedgers . %en we are positioned in a trade and we suspect that a bit of stop fishing is going to take place, or that we may be facing a seasonal anomaly, we place a hedge stop in the market. A hedge stop gets us stopped into a spread rather than stopped out of a market. We then wait hedged until the stops have been run Once thev have been run, and we are sure the market is going our way, we can lift our hedg~ and hold a position in the market. If the first time through is a real move, and we are convinced that it is, then we act as a

contrarian and reverse our position. We do this by liquidating the original position and staying with the position we put on as a hedge If what Ive just stated leaves you puzzled then re-read it until you understand it . This concept may be one of the most important things you will ever learn about trading. We are talking here about the "thinking" persons way to trade If you think you do understand, then continue on because next Im going to go through a chart example of what Im talking about. Where will you place your stop if you see a market breakout during a seasonal window where you have an entry signal? Perhaps a better question would be when should you place your stop in the market in light of the problem of stop running? 232 Revisiting a Wheat Trade 233 WNIWU Do you recall one of the seasonal Wheat futures trades of the previous chapter? It called for getting short September Wheat approximately the last week of April with a proposed exit in the second week of

July. Lets look at it close up. Lets simply take the optimized entry date and optimized exit date for this trade. Well use no confirming chart pattern, no technical indicator, no filter of any kind Why? Because I want to show you how to tum a lemon into lemonade. 36.450 36.300 36.150 36.000 35.850 35.700 35.550 35.100 35.250 35.108 31.58 31.800 31.650 31.508 31,350 34.200 11 . 111 I 11 I I ii 11 I, 11 II JdO ~~I• f., 11111111111111k;; 1 I 111 III11 II111111,AplI JI ii III IIIII II I WZ/WU -2955.00 -2970.08 -2985.00 -3000.00 -3015.00 -3030.00 31,050 33.980 33.750 33.600 33.150 33,300 33.150 33.800 We want to use another month in the market for a possible hedge in case we are wrong about this trade. To do so, we will look to see which spread, if any, is the most favorable to us. We will look at WN/WU and WZJWU Based on the chart pattem WZ/WU looks stronger to me. A bottom in the spread seems to be in place in the form of a Trading Range. 1 ,.

,,111,,,,1l,l1ll1111ll11l1111ll11llll11llllll1l111I Apr rl4I . -~::•" Jan 1,,,1, ,,, Feb 234 -8.3208 -B.3400 -8.3688 -0.3888 -0.1000 -0.1208 -8.1108 -8.1608 -8.1800 -8.5000 -0.5208 -0.5100 -0.5600 -0.5800 -8.6800 -0.6288 -0.6188 -0.6680 -0.61100 -0.?808 -0.?208 -0.?108 -0.?600 -0.?800 235. -3045.08 -3060.08 -30?5.00 -3090.00 -3105.08 -3120.00 -3135.00 -3150.08 -3165.08 -3180.00 -315.89 -3210.00 -3225.00 -3210.00 -3255.00 -32?0.00 -3285.00 -3300.00 Since we decided to use December Wheat as our possible hedge, we will look at the December Wheat contract to place our hedge stop. The outright short in WU made money for a couple of days, but then prices reversed and took out the high in the September contract wz 3?6.50 3?5.00 3?3.50 3?2.00 3?0.50 369.00 367.50 366.00 364.50 363.00 361.50 360.00 358.50 357.00 355.50 354.00 352.50 351.00 349.50 348.00 346.50 345.00 343.50 342.00 You can see the similarity of the December Wheat chart with that of the September Wheat chart.

The higher price of December Wheat was because of the greater interest and carrying charges attributable to December being further from delivery than September. We also can see that there was no backwardation in effect at this time The high (not shown) in the December contract was also taken out, and so on the first day of May the trade was stopped into a hedged position WZ/WU. Was this a continuation of the trend that is now becoming apparent, or was this simply stop running? Well take a look at the market as prices progressed. Right now, I want to show you what the spread looked like at the time we were stopped into our hedge. 236 237 WZ/W1J Entry point for hedge---➔ " ,."" """ ,1,1,11, ,II 1,l 11 II 111, II1L1111111111111111 Dec Feb Mar Apr May -2955.00 -2}70.00 -2}85.00 -3000.00 -3015.00 -3030.00 -3045.00 -3060.00 -3075.00 -30"10.00 -3105.00 -3120.00 -3135.00 -3150.00 -3165.00 -3180.00 -3195.00 -3210.00 -3225.00 -3240.00 -3255.00

-3270. 00 -3285.00 - Next comes an important part of our analysis. We have reversal of trend on the breakout day, the following day, or even the day after that. This would lead us to believe that there was more to this breakout than merely stop running. When prices finally do reverse, we suspect that a correction is taking place and that prices will go higher. A correction is different from stop running A correction points to an eventual continuation of the trend You can see that a trend has formed This market was gomg up. Admittedly, it is choppy, but overall the move is up WU 37.200 37.000 36.800 36.600 36.400 36.200 36.000 35.800 35.600 35.400 35.200 35.000 34.800 34.600 34.400 34.200 34.000 33.800 33.600 33.400 33.200 33.000 32.800 32.600 3300 00 · The entry point for the spread indicates that if remained hedged, we may have lost on the hedge As prices broke out in both contracts, September Wheat gained on December Wheat. At this point, it remains to be seen whether or not we

would wish to remain hedged, drop the hedge in favor of long December Wheat, or in favor of short September Wheat. ,I . " ", I, hi" ,,111, I11,1111 Id 11111111111111111111 Jan Feb Mar Apr llay Now lets look at the position of our hedge on this same day. 238 239 By remaining hedged from the time prices broke out and stopped us into the spread, the most the trade was down was 30 ticks, or $375.00 Heres how the market looked the day the hedge was dropped. The price at which the short September Wheat was liquidated was determined in advance. 37.200 -2970.00 -2985.00 -3000.00 -3015.00 -3030.00 -3045.00 -3060.00 -3075.00 -3090.00 -3105.00 -3120.00 -3135.00 -3150.00 -3165.00 -3180.00 -3195.00 -3210.00 -3225.00 -3240.00 ◄ -3255.00 -3270.00 -3285.00 -3300.00 -3315.00 Believing that this is a correction and not just stop running, our decision is to drop the hedge in favor of a long December position the next time September prices move outside the local (most

recent) high. We note the price where a breakout of the local high took place in the September contract. We then place a buy order in the market at that price level. 240 37.000 36.800 3£,.600 36.400 36.200 36.000 35.800 35.600 35.400 35.200 35.000 34.800 34.600 34.400 34.200 34.000 33.800 33.600 33.400 33.200 33.000 32.800 32.600 1,, . l,11l111ll1l!!l11illlild111llll11ill11I . llor . , ·•· . , ay .,r Feb Jan Since we were still within the time window for this market to trade short September, we would plan to hedge our now long December position by shorting September on any day in which prices close at the level of stop we are willing to risk. In other words if we are willing to risk $400 on this trade, we will hedge the position as close ;o that amount as possible. Ifwe are willing to risk $500, we will hedge the position as close to that amount as we possibly can. Well remain hedged until the market gives a clear cut signal as to which way it is actually going to go. 241

· From the close at the optimized entry date until the close on the optimized exit date, there were 63.25 points available, or $3,16250 Obviously we would not have gotten all of the available money Heres the way the spread looked at the time it was dropped in favor of a long December position. The hedge had lost about 6 ticks, or $75 W/1WU -2970.00 -Z985,00 -3800.00 -3015,00 -3030.00 -3045.00 -3060.00 -3075.00 -~0.00 -3105.00 -3120.00 -3135.00 -3150.00 -3165.00 -3180.00 -3195.00 -3210.00 -3225.00 -3240.00 -3255.00 We did not filter this trade, which could have made it better or worse. We also did not trail a stop, which would no doubt have made possible the extraction of more of the available profit. We also did not allow the trade to run as far as it might ultimately have gone Once it became clear that this was a bonafide move with strong underlying fundamentals, I would have a tendency to trail my stop two natural support areas behind. In other words, each time prices break

to a new high, I move my stop so that it rests just below the low of the second to last retracement. In that event, I would not have been stopped out at any time during the course of the trend shown. wz 46B.00 462.00 456.00 458.00 444.00 438.00 432.00 426.00 420.00 414.00 408.80 402.80 396.00 398.00 384.80 37B.00 -3270.00 -3285.00 -3300.BB I lll,,,,11,,l1111ll1i111l,iillill1l111lll1lll11 ···········•························"••··········"""l,l llay Apr llcll --fcb Jan -3315.00 m.ee 366.08 360.00 354.80 348.00 342.00 336.00 The trade was long December Wheat. For the sake of this example, lets assume we are willing to risk $400. At that amount of risk we never again would have to hedge this trade. The most it went against us was $375 • , •• , . , , , • , , , ,, • , • , • , o1 , • 242 ii I 111 , " ", 11 1ii ,1 11 ii IJI11 ii 111, IIIii I 111 IJI I Ill 111 ~ - 243 u

330.00 ct at a time just a few davs beLet~ take a final look at this Dec ember ~eat contra end. tmg mteres an has fore It exprred. The trade wz m/. l ~ I{fif fNt tfhtl}J µn ~) }il 1ttf ii I I I I11 IIi ~i{ { l . , """"··- li,iJ l 11111 1 I1, 11111 /1iii II11 I11111 iII II111 IIIII111111111 iiOct IIIIIIIIIIIIi IIII111 I11, 11 IIIII11 I11111 I1, 1i/ IiSep Nou Jul 51&.00 510.00 504.00 498.00 492.00 486.00 480.00 474.00 468.00 462.00 456.00 450.00 444.00 438.00 432.08 426.00 420.00 111.00 408.00 402.00 396.00 390.00 384.00 378.00 Aug also see the day the stops at You see the first and second natural support area. you closely at that day. Notice the secon d natural support area were taken out. Look happened the following dav that It Is an ~xtra long daily bar. Now notice what market, not the locals, r~ the You guessed It, pnces reyersed. The strong hands in of paper accumulated bet the stops. There must have been a considerable amoun those

stops were run once that neath that second natural support area. Notice low. that went again Whea t pnces never hands from doing this The There ~e times when there is no way to stop the strong to use a hedge stop ~ather only thing tha t could have been done would have been you in the market until you than a protective s~op. The hedge st op would have kept A knowledge of the fundawere sure as to winch way It was ultnnately going to go. this particular situation. in stop mentals would have encouraged you to use a hedge 244 up the best of trades. We Next, I am going to describe a few events that can mess what to do when they hapneed to be aware of these events and we need to know that weve already disone is pen. The solution is the same for all events, and it . cussed a number of times throughout this course Reports Some of these reports have Various entities put out various reports at various times. them to go somewhat berserk a great impact on the futures markets and can cause on

up to a few weeks. for a period varying from a few minutes to several days, The Cattle on Feed Report The Crop Report can cause the grains to react violently. the Pig Report can cause and s, future can cause wild gyrations in the Live Cattle s. future similar gyrations in the Live Hog t cause the Crude Oil I have seen the American Petroleum Institute (API) Repor wild A meeting by the OPEC cartel can causes a comparable Complex to go wild. reaction in this complex. officials and dignitaries, Government economic reports, speeches by government spokesmen can cause their and banks l centra and proposed actions and speeches by futures. index stock and rate, st intere huge fluctuations in the currency, al trade when one of these rePicture yourself safely ensconced in a winning season ngs because of the reaction to ports come out. Can you imagine losing all your winni yourself, what do you do? t a report? It happens many times! How do you protec Options Expiration s trading to take place is

the Another event that can cause frantic short tenn future large firms that write most of day that options are due to expire. Why? Because the in-the-moneyt When options the options are not willingly going to let them expire price, and futures prices are writers are overwhelmingly short a particular strike tion day, these large firms can challenging their position at or close to options expira attempt to drive futures prices an muster an army of traders to buy or sell futures in expire worthless. Similarly, will s option away from the threatened strike so the ent to these large firms that appar es becom it when at or near options expiration day attempt to move the market they cannot defend a particular strike price, they may to enter the futures ahead away from the threatened strike just long enough for them 245 of the endangered strike, and then reverse their futures position. From their now winning futures position., they can explode prices through the formerly threatened strike

in an effort to drive prices high enough or low enough to cause options premiums at further-out strikes to become exceedingly high. At that point they will sell additional options at very high prices to go along with their winning futures trades. There you are in your winning seasonal futures trade. You are an ant and they are the elephants. What happens to the ants when the elephants stampede? Your winning position can be turned into a loser in a short time do y~u ~o? What can you do? Think for a moment! We have already covered It earlier m the course. Heres a hint. The futures markets serve a purpose that enables people to ? Wha! Let me give you an example of each situation. Suppose that on expiration day, T-Bond futures prices are approaching an even numbered strike above the market. Suppose also that there is a very large open interest in the Calls at that strike The large traders and large firms who have written those Calls do not want them to expire in-the-money. They will

sell futures in an attempt to drive prices down so that the options will expire out of the money Suppose that two days prior to options expiration day Soybean futures prices are collapsing and moving strongly toward a very large number of Puts written by commercial interests. Suppose also that those interests realize that they cannot stop the collapsing prices in Soybean futures. These large firms can attempt to get short futures ahead of the threatened strike If prices have already reached the threatened strike, they may enter the market long by buying large amounts of futures contracts. They may attempt to drive prices upward and away from the threatened strike just long enough for them to short futures ahead of the short Puts. If they are able to accomplish this, they are now in a winning position There is no way for them to lose on the short Puts and they no longer care if those Puts finish in the money. To amplify their winnings, they may sell considerably more futures contracts

than they bought in their effort to drive the market away from the threatened Puts. This extra selling will cause more distant Put strikes to rise exceedingly in premium. The added selling causes great volatility in the market and options premiums rise markedly in response to increased volatility. The large firms may then choose to take advantage of those extra high premiums by writing more Puts at inflated prices, far below the current market. Is it wrong for the large firms to do this? Wouldnt you do the same if you had the capability? When they act in this manner, the large firms are simply being astute in business. Maybe thats how they got to be large firms in the first place. They have a strategy and those are the tactics they are using to carry out their strategy. Holidays ~Vic, a large trader in the Japanese Yen, had a plan. The markets Volatility would be closed Friday for a holiday. Vic knew that on Thursday, ahead of the holiday, the market would be very thin In fact, many

traders would not even show up, because they wanted to get a head start on the holiday. On Wednesday, minutes before the close, Vic began to sell Yen futures. He sold a number of contracts and a bank stepped in and bought them. He then sold a larger number of contracts, and another buyer faded his order. He sold even more contracts on his next offer The Bank of Japan bought those His next offer was larger yet. At that point, Yen futures broke The market collapsed and Yen future s went crashing down. The Bank of Japan took a terrible hit During the close, Vic covered his shorts and went home flat It was a great day for Vic The next day, the day before the holiday, the market was even lower. During the night, ~~e~cy traders worldwide picked up on Vics momentum and bashed the Yen, drivmg It further down. On Thursday, knowing the futures market would be thin, Vic showed up and began buying huge amounts of Yen. Ye~ futures rose in respo~se to his buying Vic bought fast and furiously at

different times throughout ~e trading hours. ~y the time the market was to close, the Yen was considerably higher than where It had closed the previous day. Vic unloaded his long futures and went home happily flat The preceding incident is based on a true story. Ive changed the details just enough so that you will not know who it was and in which market it happened. What if you had a winning seasonal long Yen futures position when Vic decided to short futures just before the Wednesday close? You would have seen all or most of your profits disappear. You may even have sustained a considerable loss What could you have done? How would you protect yourself? Hedging With Spreads 246 247 The solution to all of the. described situations is to learn to spread ahead of these events. When you know that a report is due out that will affect your trade, hedge by spreading. When you know that you are within a few days of options expiration, and futures prices are threatening an options strike

price having a relatively large open interest, hedge by spreading. When you know you are within a few days of a holiday in which the markets will be closed, hedge by spreading. The professional traders "even-up" their positions before such events. Shouldnt you? The financial futures can become very quiet two to three days ahead of a major report. Why? Because the professional traders, those who do the majority of trading, will get themselves relatively flat waiting for the report to come out. Professional traders know better than to be in a market a day or two ahead of a holiday. If they retain a position, they spread it so they cannot be hurt Knowledgeable professionals are acutely aware of options expiration dates. If they continue to hold a position, they protect it by offsetting in some manner. Shouldnt you do the same? Now I want to show you three Live Hog charts I simply chose at random. They all show February Live Hogs because thats what you would have been trading in

December. Live Hogs are a thin market at any time The last day of trading before Christmas the market is extremely thin. I have watched this market since the day it began trading. I dont like to trade it other than with options positions These charts will serve to show you how a thin market can be run, first one way and then the other. They will also serve to demonstrate to you what can happen just before a holiday. The three charts are typical of Live Hog price movements just prior to Christmas. You might find it interesting to check many charts in vari~us markets over a period of many years to see what happens to prices the last trading day before Christmas. Get set for a shock if you do. Then you might trY looking at all markets the day of a major report, and from now on, observe what happens on ?ptions expirati?n day when strikes having major open interest are threatened. ObVIously I cannot mclude hundreds of such charts in this course. However, I guarantee that you will have a

major eye-opening experience if you undertake to do as Ive suggested. The Hog charts follow. The most money is made in the markets by those who are able to maintain a position for many days, weeks, or months. My very best student carried a long position in the S&P 500 for at least six years. During those years he made a fortune At the time of this writing and to the best of my knowledge he is still long, going into his seventh year. His stop is such that there is no way he can lose But prior to that time, he regularly hedged in the NYFE stock index futures. My very first student made over one million dollars in T-Bond futures. He held 100 contracts for over five months. He never allowed himself to be stopped out Until he could maintain a stop at a considerable distance from the current price action, he regularly hedged in the T-Note futures. He hedged ahead of reports, holidays, and options expiration days. He dropped his hedges only when he was convinced that T-Bonds were moving

higher. At times he made money incrementally simply by being short the NOB Earlier in this course I showed you a 500 point day in the Japanese Yen. I also showed you that had you been spread, the amount of heat you would have taken was considerably less than the devastation you would have suffered in the outright futures. 248 249 LHG [j 111111111111,, l~(I II111 I11111, 1I Ilj~ 111111111111 I1/j[I III11, 1111111, 111,~.:i,, 30.250 30.008 29.750 29.500 29.250 29.000 28.750 28.500 28.250 28.000 27.750 27.500 27.250 27.fl!:)0 26.750 26.500 26.250 26.000 25.750 25.500 25.250 25.000 21.750 21.500 51.000 50.500 50.000 49.500 49.000 18.500 18.000 17.500 17.000 16.500 16.000 15.500 15.000 H.500 H.000 13.500 13.000 12.500 12.000 41.500 41.000 10.500 40.000 39.500 12-21 This particular year, the.last trading day before Christmas was December 21 The market gapped dovm on the open and traded down briefly before heading higher The locals ran the market from one extreme to the other

creating an outside day. This is typical of the kind of price action you will see in many markets on the trading day before a holiday. 250 This year the locals on the floor really had themselves a party. They opened the market with a tremendous 100 point gap (limit is 150 points). They filled all the buy stops above the preceding double high right at the open. Then they shorted the market for most of the day badly burning all the longs As you can see, they didnt do too badly for themselves on the first trading day after Christmas, or the two days following. The last down day in their series was??? You might have guessed it December 31, the next thin day prior to a trading holiday 251 LHG Z1.258 Z1.808 Z0.750 Z0.508 Z8.Z50 ze.eee 19.750 19.500 19.Z50 19.000 18.?50 18.500 18.Z50 18.000 17.750 17.500 17.Z50 17.000 16.750 16.500 16.Z50 16.000 15.758 15.500 In the year above, the locals must have been tired of running stops on the long side. This time they nailed all the sell

stops at the open. However, they must have been feeling the Christmas spirit of generosity and giving, because it could have been a lot worse. After filling all the sell stops, they could have then taken the market up doing just the reverse of what we saw on the previous page. Chapter25 Carrying Charge Spreads There is a type of spread that is seasonal in a somewhat different manner from all other seasonal spreads. The carrying charge spread is in season whenever a certain situation occurs. I dont believe there is any service in particular that can give you accuracy statistics for carrying charge spreads. Few traders know about them, but there is a seasonal situation in which it pays to investigate them. Sure Thing Spreading The carrying charge spread is as close to a sure thing as one can get when conditions for trading it are right. They are especially worthwhile investigating: 1) in a prolonged bear market. 2) when it is likely that interest rates will fall Therefore, I

especially look for them in conjunction with the fact that seasonality indicates an outright seasonal short position for a particular market. To trade this kind of spread you will have to do a bit of leg work. You will have to ascertain the prime rate of interest, and the amount being charged for storage and insurance for each market in which you wish to take a position. What Are Carrying Charges? Storable commodities, grain complex, cotton, frozen concentrated orange juice, metals, energy complex, cocoa, and coffee are examples of commodities that sustain carrying charges. 252 253 Carrying charges are made up of interest, storage, handling, and insurance, with interest charges being by far the greatest part of the cost of carry. Some currencies, interest rate futures, and stock indices have carrying charges, but these markets are not storable commodities. At the time a futures contract expires and delivery is to take place, the full costs of carrying the commodity will be

incurred and have to be paid in cash. What Is a Carrying Charge Spread? A carrying charge spread involves the differential between two futures contracts of the same commodity, but calling for delivery in different months. For instance, the spread differential between October and December Soybean Oil is, at least in part, made up of the difference in carrying charges. In a normal market, the distant month would be at a higher price than the nearby month. Carrying charge spreads are usually undertaken in a normally priced market, but can become more profitable in a market that subsequently goes into backwardation. Normally the progression of prices for storable commodities is that distant months tend to carry higher prices than nearby months. This progression of prices is called the contango Backwardation, you may recall, is when the normal progression of prices becomes inverted If the price for the distant month is equal to or greater than the price for the near month plus the carrying

charge for the period between, the spread is considered to be a "full-carry" spread. In actual practice, canying charge spreads seldom exceed 80% of full carry because the commercial traders are able to borrow at less than the prime rate of interest. risk is very low. If the trade is working, I will hold onto it until first notice day in the nearby month but no more than a day or two thereafter. I dont want to run the risk of being delivered upon. If the trade does nothing at all, I will drop it and eat the commissions and fees for having entered the trade. As the spread gets closer to full carry, it attracts more traders, mostly commercials who are acutely aware of these spreads and buy the nearby contract while selling the distant contract. The buying causes upward pressure on the nearby contract, and downward pressure on the distant contract. The spread will then narrow or move away from full carry. Since I am long the nearby contract and short the distant contract, with

the nearby contract gaining on the distant contract, I am making money Carrying Charge Spread Advantages The carrying charge spread has all the advantage of spreading. In particular, nobody has any idea what it is that you are doing, not even the traders at a spread desk. No one is going to run your stops You can enter such spreads in virtually every market that incurs carrying charges, even markets like cotton and orange juice. They are especially good in the metals, because with metals interest rate make up close to 99% of the costs of carry. If taken in conjunction with a seasonal short in a downtrend, you will encounter spreads that go as close to full carry as they can possibly go, and may, in extremely rare cases, go beyond full carry because of bearish sentiment. Ideally, we want to see the development of backwardation because usually when that happens, the near month will begin gaining on the distant! Carrying Charge Spread Risks How Do You Trade a Carrying Charge Spread? I

mentioned earlier that these spreads work best in prolonged bear markets. Therefore, I look for seasonal short positions in markets that are already moving down at the time. If an outright seasonal futures trade calls for selling a commodity, and that commodity is already in a downtrend, a carrying charge spread will be an almost "sure thing" trade. In such a situation, I buy the nearby month and sell the distant month. If I am able to sell the distant month at or near full carry to the nearby month, the chances for failure are extremely slim. The risk is about as low as it is possible to get when trading futures. I have the filter of seasonality working in my favor, and unless some unusual or unexpected event occurs that would suddenly cause the situation to change, the carrying charge spread is going to work. The profits from such a trade are good and the 254 As mentioned earlier, the carrying charge spread is typically done when you expect interest rates to fall. The risk

in a carrying charge spread is that there may be a sudden upward surge in interest rates or that nothing at all will happen to interest rates Such situations seldom occur in bear markets, but be aware that when trading, anything can and does happen. If conditions suddenly change, liquidate the trade Keep your losses small. Computing Carrying Charges A bit of research is involved in computing carrying charges. I always call my broker or the exchange to find out the current costs of storage and insurance. For interest rates, I figure 1% over prime. Of course, the commercial interests are able to obtain lower interest rates than 1% over prime, and that is why you seldom see more than 255. 80% of full carry by the time you have to liquidate the spread. The commercial interests are often able to borrow at fed funds rate, which is usually lower than the prime rate. Interest is computed on the entire amount of the contract. For example, if Soybean Oil is trading at .2500, the contract is

worth $15,000 (60,000 pounds x 2500), and the prime rate is 9%, then you would detemrine the interest to be 10% (1 point over prime) of $15,000 or $1,500, or $125 per month. If your broker tells you that the cost of storage and insurance is 10 points per contract per month, then storage and insurance for a Soybean Oil contract is going to be $60 (10 points x $6) per month. Lets assume you had an outright seasonal trade in Soybean Oil that called for you to short the May contract. You look and you see that May Bean Oil is already in a downtrending market, and is priced at .2500 You notice that the July contract is also in a downtrend. You find out that on the day of entry, interest rates, storage, and insurance are as stated above, and that interest is going to cost $1,500. $1,500 divided by 12 months means that interest is $125 per month. You determine that the rest of the overhead will be at $60 a month for the May contract. When to Use the Carrying Charge Spread Carrying Charge

Spreads are a way to incrementally pick the pocket of ~e market. You will have little competition when you trade them. They may be especially good for traders who have difficulty in shorting a market in a downtrend. The carrying charge spread is used to profit from a change in carrying charges. Storage and insurance costs are small in the costs of carry This is particularly true in the calculation of carrying costs for the gold and silver, where storage and insurance comprise about 1% of the costs of carry. Any change in carrying costs can, for all practical purposes, be attributed to a change in borrowing costs. A carrying charge spre~~ is a way of managing a change in interest rates. Gold and silver are ideal commoditJes to trade as a spread because of their direct relationship to interest rates. Our example will be a spread using silver Assuming an existing downtrend, and a seasonal short is called for, to trade this spread effectively you must make a judgment on the direction of

interest rates. At the time of entry, there is no backwardation in the market. You look at the July contract and you see that it is trading at .2535 The July contract is going to run two months longer than the May contract. Suppose the prime lending rate is at 10%. If you thought interest rates were going to decline, you could attempt to profit from this decline by using a carrying charge spread. For instance, you could short a distant month because it would not cost as much to finance the metal in the future as it does in the present. You would go long a nearby contract, expecting the spread to narrow as rates declined. You compute the following: May Soybean Oil: Lets say that the prime rate fell to 8%. The following table shows the result 60,000 Lbs. x 2500 = $15,000 = value of May contract 10% x $15,000 = $1,500112 = $125 = monthly interest on one BO contract. 10 points x $6 point for Bean Oil = $60 = monthly overhead for one BO contract. 2 months x $60 = $120 = total overhead

for two months for one BO contract. 2 months x $125 = $250 = total interest for two months for one BO contract. $15,000 + $250 + 120 = $15,370 the theoretical price of full carry if May were to be carried an extra two months. $15,370 / 60,000 Lbs.= 2562, the theoretical price per pound for July Bean Oil July Soybean Oil is at .2535, therefore the spread would be at 5645% of full carry The July contracts value at the time of entry is $15,210. Full carry is equal to .0062 The actual difference is 0035 Therefore, May vs July is 5645% of full carry (.0035 / 0062 = 5645 of full carry) 256 257 Example of Carrying Charge Spread In Silver Date June January Action Futures Price per Ounce ProfiU(Loss) per Ounce Buy one 5,000 ounce December Silver contract $5 75 Sell one 5,000 ounce February Silver contract $592 Sell one 5,000 ounce December Silver contract $4 85 ($0.90) Buy one 5,000 ounce February Silver contract $4 97 $0. 95) $0 05 $0 05 Total Profit/(Loss) Chapter 26

Converting Daytrades to Spreads $250 per spread Seasonally or not, when you see a bear market, take a look at entering a Carrying Charge Spread. If nothing else, you will learn a good deal more about how markets work than you ever previously knew. Question: Why would anyone want to convert a daytrade into a spread? Answer: Because at times it is good sensible business to do sol Question: Isnt it true that daytraders have to be out of the market by the close? Answer: No! Question: What possible benefit can you gain by spreading off on a day trade? Answer: You can hedge a position until you are more certain which way the market will go 1 You can drop the hedge intraday or you can keep your position hedged up overnight. Question: Why not Just get out of a trade you are not sure of and reenter later? Answer: You probably wont enter later or you might not be able to enter laterl The reality of trading is that rules are made to be broken. Will it hurt your feeling of security to convert a

daytrade into a spread, perhaps one you even hold overnight? There is no law against holding a daytrade overnight. There is no law against converting it to a spread and holding the spread until you are more certain of market direction Its a lot better than moving your stop further back to "give the market more room??!!" 258 259 Allow me to relate to you one of the most inane statements Ive ever heard made by a professional trader. He said, "Joe, Im entirely into daytrading now I just could not stand leaving all that money lying on the table." It is my opinion, after having traded almost every way imaginable way for close to four decades, including over twelve years of daytrading like a mad fool, that it is the daytrader who leaves the most money on the table. I am not knocking daytrading. It has its place among the trading tools that are available to be mastered by any trader who is inclined to do so except in the case of a limit move, you can drop the wrong

side of the trade and keep the winning side. If you are long D-Marks at the CME, and at the end of the day you are in a winning position, you can create a perfect hedge by shorting two D-Mark contracts at the Mid-Am. If during the night the D-Mark moves 200 points in a direction that would have been against you, you will not be hurt because you are flat. You are equally long and short. When you are finally convinced that the D-Mark is going to continue to move, which is entirely possible because of the momentum behind the move, all you have to do is drop the losing side of the trade and keep the winning side. Im not even against daytrading all day long, if that suits your emotional and psychological makeup. However, when a daytrader is holding a winning position at the end of the day, why should he let go of that position? Is it because the rules in his mind say he has to? Is it because he doesnt want to make additional money that may be available by staying with the trade? Is it

because he feels sorry for his broker, the NFA, and the exchanges, and wants make an offering to them of additional commissions and fees? Perhaps the daytrader is afraid to hold his position overnight? Yes! That may be it!! He is driven by fear. Yet, every hedger knows that spreading off the risk can greatly reduce the impact of any calamity which might take place in a market overnight. The locals in the trading pits understand how to spread off, and their positions are usually a lot shorter in duration than that of a daytrader. Ive already shown how a hedged trade in the Yen could have easily withstood a 500 point move. I can think of dozens of examples in which limit moves occurred in markets where I, as a daytrader, had hedged my position and safely rode out the wild gyrations of a market gone seemingly insane. I have entered tight markets with both long and short positions, through different accounts at different brokerages. In other words, Ive entered the market absolutely flat

waiting for the inevitable break to one side or the other. "But," you say, "Why not simply get long when the market breaks to the upside, or get short when the market breaks to the downside?" The answer is that the move may be such that you cannot get in! The move may be such that it startles you and your fear or caution will not let you in. However, 260 If you are short Soybeans and have a winning trade at the end of trading, why not spread off on another month? You can buy a back month contract and have an almost perfect hedge. Who knows, with a little luck and planning you may even make money on the spread? You say, "But ifl hold Soybeans overnight I will be held to full margin and I cant afford that. My account is not big enough" I say, "For an overnight spread m Soybeans, your account may very well be big enough!" At a time when Soybean margin was $1,350 per contract, spread margin was $500 Even the S&P 500 can be spread for holding

overnight. Granted, S&P 500 back months are very thinly traded. But you can usually find enough traders to lock in a spread. At least you can try The volume may be 500 contracts, or it may be 1500 contracts. At a time when S&P 500 margins were $9,000 per contract, S&P spread margins were only $490!! Thats right, only $490. Surely anyone daytrading the S&P 500 can come up with that much margin. What exactly are the advantages of hedging a daytrade? For the price of a commission, you can buy more time. The advantage is tactical in that you may not have been able to enter a particular trade, but by being already in the market you can decide when and which side to drop. The advantage is psychological if you find it easier to drop a position rather than enter a position. (There are many traders who fit this description.) 261. The advantage can be financial if the spread begins to outperform the outright futures position. Of course, this will never happen in cases of a

perfect hedge. It seems strange to me that futures traders have not seen this way of trading as a viable tactic. Yet it is commonly done among options traders It is not a big problem for an options trader to buy both an at-the-money Put and Call, and when the market breaks to drop one or the other and thus be either long or short the market via an option. The identical situation can be achieved by a futures trader having two accounts I have even heard of a futures trader having two accounts with the same broker. He did it so he could be both long and short at the same time His broker was aware of the way he traded, and periodically shifted money from one account to the other to keep them in balance. Chapter 27 Wrap-Up I am going to end this course with a review of certain thoughts and concepts that I have and hold with regards to trading. Since Ive been a private individual trader all of my trading career, my views are necessarily derived from that perspective. Comfort I feel it is

extremely important for a trader to find his level of comfort in trading. That entails discovering the following: Account size: You must find the accow1t size with which you are at ease. Coincident with that, you must find out how much of it you are comfortable in trading. What I mean is that one trader may be comfortable trading 80% of a $100,000 account, whereas another trader, in order to trade a similar amount of money, may need to trade 16% of a $500,000 account. Use a cushion with which you feel comfortable I cannot tell you how many dozens of times I have been contacted by letter and by telephone by aspiring traders calling me to ask how big an account they need to have to "make a living" as a trader. Think about the absurdity of that question. How much money is a "living?" Is a "living" the same for you as it is for me? 262 263 Contrary to what you may read or have read in magazine ads and fliers that are beyond my control to edit, I live a

very simple life, one in which I am constantly trying to get rid of material possessions. I am at that stage of life where I no longer want a lot of "things." Markets: You must discover those markets in which you enjoy trading regardless of what others may say about them. If you are getting good fills and making steady profits in one or more markets, stay with them. Learn all you can about them, and trade there, even if that involves trading in only a single market. Time-frame: Determine a time-frame in which you are at ease in trading. Select one that gives you adequate time to think, one that is suited to your temperament. Decide whether or not you want to be a daytrader or a longer tenn trader. If you want to trade seasonally, you will probably choose the daily charts But if trading the daily charts drives you to distraction, then perhaps you are better off trading a five minute chart. Only you can make this determination. It is a totally individual decision Not all ofus

can stand to be enslaved to a five minute S&P chart all day long. Not all of us can stand to wait an entire month to see one more bar on our chart. Charts: Select the kind or kinds of charts you will look at. Do you prefer candlestick charts? Fine, use them They give you a strong visualization of a very important concept in the market, the relationship between the open and the close. Do you prefer line charts? Wonderful, your perception of a market will be somewhat different from that of most of the other traders. Heres a suggestion, try using a line chart that connects open to open rather than close to close for the session you are going to trade. The open is far more important than the close The open reflects many more hours of price discovery world wide than does the close, which reflects only a few hours price action. Try looking at Point and Figure charts. I have a friend who is a successful trader using Point and Figure charts It wasnt until he switched to them that he became

successful. Indicators: If you are going to use one or more indicators in your trading, then you must know everything about that indicator that is possible to know. If possible, learn how it is constructed What aspect of the market does it measure? Learn its patterns of behavior. How does it act when a market is trending? How does it act at the beginning of a trend? How does it behave at the end of a trend? What does it look like when a market congests and moves sideways? Remember, too, that an indicator will always lag the price action. Indicators, without exception, are totally dependent on what has already happened I used to think that there were such things as "leading" indicators. But logic alone should tell you that such a thing is impossible. The greatest weakness in using indicators is that you become married to them This takes away your flexibility and skews your ability to think. However, if you trade best when using indicators, then use them. Use those with which

you are comfortable Brokerage: Finding the right broker for your chosen style of trading is of the utmost importance. It is one of the toughest jobs a trader faces As a rule, brokers are an odd lot. You may have to search long and hard to find a broker with whom you are compatible, who gives you good service and good fills, who stays in the industry (the turnover is very high), who is generally honest, who understands the way you trade, and who will give you reasonable commissions and margin requirements. Predicting I have probably written this a thousand times in other places: "It is not within the reahn of man to be able to tell the future. Telling the future is reserved for God" You will no doubt read about people, methods, and systems that can predict tops and bottoms. My advice is, dont believe a word of it! If anyone really knew how to tell the future, why would they tell you how to do it? Anyone who can predict highs and lows would be filthy rich. Anyone who could

truly tell tops and bottoms, or where, when, and how much a market will turn, would surely own the whole world and would probably set himselfup as God. As the famous saying goes, "in a land where everyone else is blind, the one-eyed man is king." The results of trying to predict the future are these: 264 265 You cannot predict with sufficient consistency to actually trade by your predictions. When you do predict, you will become married to your own view, and will lose the flexibility needed to change when you are incorrect about your prediction. Mechanical Systems Vlhile I agree that it is possible to trade with a mechanical system and win, to do so takes an iron discipline - one much more difficult than the discipline needed to trade as a thinking person. You have to be willing to bite the bullet and follow the system come hell or high water. This is not a way that has been comfortable for me in my own trading. In addition, there is a total loss of flexibility when

trading a mechanical system When trading a mechanical system, one becomes a slave of that system. When markets change, and they do so with increasing frequency, you are a prisoner of your mechanical system. You are unable to change You are in a marriage gone sour and have no way out because you have never really learned how to trade. What you have learned is how to follow a system, and how to have a rigid discipline. While that may be commendable, it is not really trading Stops Learning where other people have placed their stops is one of the most important lessons you can learn. When you are trading, it is absolutely essential to determine where the paper is. The market is always going to go to wherever the orders are You can determine where the paper is by calling your floor persons, or have your broker call them. You C<!ll also detennine where it is by noticing where natural support and resistance are located Sooner or later, prices will move to where the orders are and the

floor or the strong hands in the market will run the stops They are not out to get you. They are trying to make money, and if there are a lot of sell stops below them, they are going to sell knowing that when they cover their shorts by buying, whoever has that paper is going to sell to them. Fundamentals Whereas I do not trade from fundamentals in the sense that most fundamental traders do, I have found that it is essential to be aware of the type of fundamental knowledge that can be found in the news and other easily accessible places. You must be aware of report dates, options open interest, breaking news, weather, governmental policies, etc. Basic fundamentals such as these are of particular importance to seasonal traders You must try to ascertain the probability of the success for a seasonal trade. You simply cannot spit into the wind If there is a reason why a seasonal trade will probably not work, then by all means create a plan to fade that situation. Such trades usually work

better and longer than the seasonal trades would have worked. Such trades are relatively few and far between, but when they occur, jump on them and trade them with the utmost confidence that huge profits will be available. Be Aware of Order Flow The market goes nowhere until orders come in from off the floor. The floor traders are mostly scalpers and it takes orders from the retail trade, the commercials, the large traders, the funds, managed money, or institutional traders to cause real movement in a market. Until this outside money comes in, prices will go nowhere in particular and a market will remain congested in a tight trading range Order flow can be monitored via volume, but remember that volume is always reported too late to do the off-the-floor trader any good. One way to find out what is going on and the amount of volume in the market, as well as whether or not large trade participants are in the market, is to have adequate connections to the floor. You can find out who is

trading and the degree of volume simply by asking someone at an arb or trade desk what is going on. Know How to Give Orders Conversely, if there are sufficient buy orders above the current price action, someone is going to buy at the current price level, knowing that when prices rise to a level where the buy orders are located, they will be able to liquidate their long position by selling to those buyers. You must make it your business to know and understand every kind of order that can be given and what it does. You can then plan entire strategies with that knowledge, because ordering is part and parcel with the kinds of tactics you use in 266 267 implementing your strategies. For that purpose, I have prepared a course on tape cassettes. Trading Order Power Strategies teaches you how to order and how to use ordering to increase your profits and minimize your losses. See the Appendix C for further details. I am constantly amazed at how little attention is paid to this vital

aspect of trading You must know everything you can about order placement, tactics, and strategies. avoid being greedy Quit trying to win the lottery in the futures markets. If you take a lot of chances and are a gambler, you are in one of the worst places you could possibly be. In a gambling casino or at a race track, you do not start out in a hole You do not have to pay commissions and fees. When you use the futures markets to gamble, you start out as a loser every time. You are always in the hole by the amount of your overhead. And, believe me, it is considerable You have the costs of data, brokerage, exchange fees, hardware, software, maintaining an office, etc. Stay Flexible Be a trader, not a gambler, and take your profits regularly. One of the most important things Ive learned over my long association with the markets is that markets can and do change. In recent years, markets have changed more rapidly than ever before. To be able to profit in such markets, you must be able to

adapt, to change with the markets. To do that you must remain flexible and willing to change. That is why mechanical systems are a greater hindrance than you might imagine. I have seen mechanical systems that worked well for many years, but eventually they failed. You think to yourself, "what do I care if markets change, all I want is for this system to work long enough for me to make my money, then I can run!" I have no doubt that such has and will happen to some traders. Many of the great luminaries of trading had that exact thing happen to them. They made a ton of money during a short period of time, and now they spend their time writing about it and basking in former glory. However, that is not the way to make a career of trading. All too many of those who hit it big during a short period of time end up giving back all of what they made and more. Ive seen it happen dozens of times Trading for the short run, knowing that what you are doing is going to fail when the markets

change, is a fonn of gambling A career trader knows the markets will change and that he has to change with them. Its the only way I have ever seen to have and maintain a career as a trader. I wish you the very best in your trading. Joe Ross Learn to Take What the Market Gives You A professional trader learns to take consistent profits out of the market on a regular basis. I know many professional traders who have never, during long careers, hit a really big winner. They never caught the grains during a drought, they were not short the S&P when it crashed, and they were not long any of the currencies when they made 500 point days. They learned to take their profits out of the middle or wherever they could get them. They learned to be satisfied with whatever the market handed them. They were already out of the market with their money when the big move came. This is the life of a professional trader Be consistent, be disciplined, and 268 269 Appendix A Chart Patterns for

Outright Seasonal Futures Charts Made Easy Note: The material in this appendix is not new. Much of it is taken from my course on TRADING OPTURES AND FUTIONS. I present it here primarily for the benefit of those who are not familiar with my other writings What does a spread trader need to know about the futures markets to successfully employ them in his trading0 The answer is, surprisingly little. Since this book is not a primer on futures trading, I assume that the reader has at least a basic understanding of what a futures contract is, and the mechanics involved in the trading of futures. In my previous works, TRADING BY THE BOOK, TRADING BY THE MINUTE, TRADING THE ROSS HOOK, and TRADING TS A BUSINESS, I have presented various chart formations, and methods and techniques for trading those formations. The formations discussed in those books have stood the test of time. This appendix briefly describes those formations. Seasonal futures are merely another method or technique for

trading those same price formations. 270 271 This should not come as a surprise. Virtually anything you can do with a nonseasonal futures contract can be accomplished by the buying and selling of seasonally filtered contracts My success as a trader is a testament to the infallibility of the time tested price formations I will be showing you. Recognition of these basic chart fonnations has enabled me to profitably trade the futures markets for many years. The trnth is the trnth, it does not change THE BREAKOUT OF A TRADING RANGE Most of the time, a Trading Range will be preceded on the daily chart by either a gap or a day which is relatively large in size from high to low. The next figure illustrates this point (Readers of my other books, please note that I may or may not draw an expanded envelope around a Trading Range when trading seasonally. Whether or not I do is subjective, based upon what I am seeing on the chart.) Those readers thoroughly familiar with these chart

fonnations may wish to skip this appendix and move on to the next. However, you may find a review useful to your trading. Any other price fonnations used for trading seasonal futures was shown in the context pertinent to the particular seasonal strategy. ~1e•a . 1.1611 ~ 1.1522 ·-"·"-·"·-l-,.J . 1J:S8QI Patterns for Success .1:14a:1 .~J~+fl -U-~~.J .H:,l~i! Im now going to show you some very potent patterns for trading in any time frame. .-t- :?• ? 1.12::!:1 These price patterns are my major entry signals. They are not the only signals Ive shown in this manual. Others were shown in context in previous chapters Those in this appendix are ideal for grasping the basic tenets of chart reading. .112,~ICI] .U?• , ·"·"-·~•1."ill ~.111~ ~.11•a .J,:Jllj:J;r: -, 1~Gg.ll; .J 7 .1"9:~7! -~-~--l-~ . .1WJ"97 Major Entry Signals My major entry signals are as follows, and J give them my highest priority are all

derived from the DAILY BAR CHART: They My first step after noting a gap, a series of gaps, or a large size trading day, is to begin to watch for a Trading Range to evolve. Here is how it will usually happen: • The breakout of a Trading Range • The breakout of a 1-1-3 high or low. • The breakout of a Ross Hook. • There will be a gap or large one day move up into or down into what will eventually be seen as a Trading Range. • There will be a leg (this is a leg/, or this ) counter to the thrust of the gap or large day move. • The breakout of a Ledge. Lets take these in the order listed above. 272 • Then there will be a second leg back in the direction of the gap or large single day move. At that point, the markets most recent action looks like this/ or this V from a birds eye view. 273 It is then that I draw a horizontal line across the highest high and a parallel horizontal line across the lowest low. It will usually take about 10 days or so for all of this to

happen. The fonnations / or V constitute "market swings." apI can now set a mental alert or a computer alert, or both, to tell me when I am proaching the proximity of these numbers which represent the outer limits of the envelope. Any non-gap breakout of these numbers will constitute an entry point for me to trade. This will be the least frequently occurring entry technique in my arsenal, but it will be one of the best. The thrust out of an envelope will yield many a worthwhile trade The next figure will serve to demonstrate this point 11211 .u,, .U611 .Uil>--I, A ,I s 0 .U:122 .-!-JML .u~-°-- .uau .Ull?° ua.:u Gap up . a ,,, .!J?IJ!? .JU-1!L J.Y,-!-L .-!--!--!-1!1!111 .U~" .-!--!-~--- + My next step is to count the number of bars on the daily chart. Sometime between 21 and 29 days, a fourth leg will usually be completed. The Trading Range now looks like M, or W. If there had been a new high or low, or both, during that last leg, I would

have redrawn the envelope. Usually this is not necessary. 274 fll t~rtJ.li . ~r r~IJ/, ij ./ .H,a!!!! • In the next few days, a third leg will form, giving us N, or/. This is the beginning of what may tum out to be a Trading Range. Again I draw horizontal lines across the highest high and lowest low, unless the old ones are still intact. I have now established a rudimentary envelope that is delineated by drawing a simple horizontal line across the top of the Trading Range and-a parallel line across the bottom of the Trading Range. N I D ~ . Ran, .U!iU .u:iea .UH? I Double gap down N t,•f . l I .U61l .-1,~!!L .11:lla .115U Wi --- t~ w~~~ ·i 1ktrf l1"t· 11791 •.1u12 I go long or short the day following a close outside of the Trading Range. .11:IU .u-~u .U1UI .11~H1 .U-~ , jj! .u:at? .U?U, .l~llil .-1UI!? .l-M-llil .U-!--1-? .l-l,,!lllll .U,~<i? .u~ii;i .U~!!7 .1a,1,i .-!--?-H! • .11i198L My entry point is a

trade-through by prices of the breakout point. The breakout point is the highest high or the lowest low of the Trading Range. I will enter a trade at or (for those familiar with the Traders Trick) before the breakout. I will not enter if prices gap past my entry point. The Traders Trick is discussed in detail in TRADING THE ROSS HOOK, and TRADING IS A BUSINESS. When I take the first breakout of a Trading Range, I anticipate a short term trade, two, perhaps three price bars in the direction of the breakout. The time frame has no bearing on my expectations. Obviously, a two or three bar move on the daily chart is going to cover a lot more price movement than would a two or three bar move on an intraday chart. 275- In any event, I anticipate a short-tenn move of a few bars, followed by a correction of some kind. The more conservative approach is to wait for the correction to take place, and then attempt entry into the market. In the figure below, you can see that the first breakout

failed. After such a failure, a reentry of the range is probable and a breakout on the opposite side is possible. t171U .J-!-11i!? THE BREAKOUT OF A 1-2-3 HIGH OR LOW Lets illustrate what a 1-2-3 is: 2 <---Buy a breakout of the #2 point in an uptrend. .ll6U .u~u .u~u .-!--l-J!l-!--1 .Jl~H .Ul!U --> 3 Sell a breakout of 2 the #2 point In a downtrend. . u ~-1-, .-!--!-S~-1 .JJ;Jtliil .-!--!-S-? .U?U .u -~l .H?~ .-!--!--!-~! ,,!. µ -!, ?, .-!--!--!-ff .U11!~1 .U"-!,~ .U,ll!U .lllUl .H!?+~ On a daily chart, such a move would be nicely profitable. On a five minute chart, such a move would not have been nearly as profitable, and probably would have had the trader scrambling for his life. Should the breakout momentwn continue, resulting in an extension of the long upward trend that preceded the initial Trading Range, the probabilities are that such a resumption of the major upward trend would see the realization of a nice profit on any bar

chart, in any time frame. For more detail on how I use the envelopes described, consult my previous course, TRADING BY THE BOOK 276 Note: The #3 point does not come down as low as the #1 point in a uptrend, or as high as the #1 point in a down trend. I set a mental or computer alert, or both, to warn me of an impending breakout of these key points. I will not enter a trade if prices gap beyond my entry point I will enter it only if the market trades through my entry point. 1-2-3 highs and lows come only at market turning points at the end of a trend. I look for 1-2-3 lows when a market seems to be making a bottom, or has reached a 50% or greater retracement of a preceding leg up. I look for 1-2-3 highs when a market appears to be making a top, or has reached a 50% or greater retracement of a preceding leg down. Entry will always be at or prior to the actual breakout of the #2 point. The next figure illustrates this entry technique in action. 277 IBE BREAKOUT OF A HOOK A Ross

Hook looks like this: .ui1 .MU .~i,::s .ii::s, .!ii!1? . Ut!!i .!i9!!191 .!i91::S!I .!i!!!17 .!i""L .::S?7:~ .,;I,~ .::S:?l!? .::s,u ~The top is the point of the I hook, A 1-2-3 low formation Is not necessary. H prices go , back up and take out the point 1 of tilt hook~ I buy. The bottom Is the point of the I II hook. A 1-2-3 high formation is not necessary. H prices take ott!+ the point of the hook, I sell• .::S:U? .::s:•~--U-1-7 .,;l7?91 .::S:7J~ .::S?;l11• .::S7U • .::S~!l::S•• .::S!i,::S?•• .::S6J;l••• The 1-2-3 low is characterized by the fact that the #3 point does not come back (retrace) as low as the #1 point. A 1-2-3 high is characterized by the fact that the #3 point does not come back (retrace) as high as the #1 point. Detailed discussion of how I use the 1-2-3 to trade futures can be found in TRADING BY THE BOOK and either TRADING BY THE MINUTE or TRADING THE ROSS HOOK. The essential concept is to buy or sell as

the price action "takes out" (trades through) the #2 point. There are other refinements to this concept which are discussed in the aforementioned volumes. 278 In a sense, a hook is a part ofa 1-2-3, but it doesnt have to have a definitive high or low. It may pop out of a congestion area, or otherwise be indistinguishable as to any exact formation. Ross Hooks occur only in trending markets, whereas 1-2-3 lows occur at market bottoms, and 1-2-3 highs occur at market tops . A Ross Hook does not need more than one correction bar on the chart. In a down market, as soon as you have a higher low, you have a hook. In an up market, as soon as you have a lower high, you have a hook. The correction can be an inside bar, just make sure the market is truly trending. A more conservative view would be that to create a hook in a down market you have to have both a higher low and a higher high, and in an up market, you have to have both a lower high and a lower low to create a hook. The

choice must be your own according to experience My own preference is that any correction bar, including an inside bar, forms a hook. The next figure shows what I mean by Ross Hooks. 279 R11ss Hook (Rh). , Enlry points occur when the point of the Hook llh ;, !""" .,, 2 :Rh ~t fJOneethe#lpointofa Rhjtif111f}l ir r l\ 1,/]1!1 1--->, l j,~ I I/ t~fj fJ th, - ac on. Bh ) I 1 1-2-:3 hip is taken out. 62-7 males a new hip .- Ro ::; : - <i!::·· ~·-· · · · . I~ . Un:3 . I~? HMJ. J 3~ :::~:?.1;:: l I m ~ .1-ifl J 3 The difference be~en a I:2-3 and a Ross ~ookis that the } l ···•-~--11. ~Hook. 2 Roullo,k This is what a Ledge might look like: the failure of prices to .f:;tU :!!!c:;~;:e:~1!19 t ilJt~1lJilI nJtl a new low constitutes a THE BREAKOUT OF A LEDGE Once the #2 point or a 1-2-3 comes at an mtermediate or ma:JOJ twnm.11: 11oint at the end of a trend, and Hooks occur only after a trend Is defined by a 1-2-3.

~,. :. ~ ~~f 7 .sa•a :~; ::iiii:: This is how I determine what constitutes a Ledge: ·--~-~J::I. I look for a correction or congestion that is at least three bars in length, but no more than ten bars in length. · !l.6,9 · .-~ia The Ledge is characterized by a "squaring off of highs and/or lows, the flatter the better. Perfect squares are best A Ross Hook can occur only after a valid 1-2-3, or , in the absence of a 1-2-3 after the ~reakout of a Trading Range or Ledge. The #2 point is created by a corr~ction but 1s not a Ross Hook-- All subsequent points created by corrections are Ross Hooks. The above Ross Hooks "Rh" were tradable because they had non-gap breakouts. There are other Hooks shown, but, because of gap openings, they were not tradable. I trade the potential breakout in either direction. Opinion CANNOT be allowed to enter the picture. I do NOT know which way the breakout will occur! For every alert on one side of the Ledge, there is an

opposite alert entered at the other side of the Ledge. I can go back only as far as the first leg of the previous market swing to find a matching high or low. Ive shown 1-2-3 lows and highs to demonstrate the difference between 1-2-3s and Ross Hooks. An automatic alert should be placed the minute a market makes a hook on the daily chart. I place the alert at a point prior to the taking out of the hook The Ross Hook appears in all of my earlier books, and is discussed in great detail in TRADING THE ROSS HOOK. 280 281 < II ~ swing I I Once there are more than ten bars on the chart, I stop trying to trade the ledges. I wait for the market to start trending again, or for a full blown Trading Range to complete itself. II II II I II II III iii Why does this entry technique work so well 9 Because it takes advantage of natural support and resistance points A breakout of a natural support or resistance point will usually carry good momentum. There should be enough

explosive force to give a profitable short tenn trade. <- leg II i<-I•g swing In order to show more clearly what Im doing with this technique, I have shown a Swiss Franc chart in the next figure. SWISS FRANC ~ The following sets of four legs constitute 2 swings: / ! I I / V / I I V 7212 V 7093 When defining the Ledge, I can go back no further than the first of the four legs. 6975 What I have done here is to allow the market to tell me what it is going to do. In a sense, this technique is a "straddle.· Its not a straddle as the word is used in options trading """" 6856 6736 The technique I use becomes possible because the market decides to move sideways for a number of bars on the chart, thereby making it possible for me to straddle the prices with my buy and sell orders at natural support and resistance points. I mark these off as soon as I can draw a line with a ruler across two highs or two lows, just so long as they

match in price. I will enter a trade only if prices break out of the Ledge by trading through the high or the low (or both). I will not enter a trade if prices gap past my entry points. 282 6618 6499 6380 283 SWISS FRNIC J " 7568 I find two matchirlg highs. I find two mate~ lows 74 ,,,::1 l ~ <Then I buy the breakout of the highs, or sell the breakout of the 1 . ; ··· t .r i FTj- lows :,~g;. 1<- f Ledge trades should be taken only in strongly trending markets. You will be killed if you attempt them in Trading Ranges. What is a strongly trending market? One that is moving at a 45° or greater angle. f .1?~~ -·Itdoemtmatterwbich i-1 J11 t··t-t1 1 .?~:?;?: comes first, as Iona as the two matches l i t lt,!!J +I t t · b ar. . are separate d b y at Ieast one pnce .71171> For more detail on how I trade ledges in the futures markets, see my book TRADING IS A BUSINESS . I 1 matches do not have to be exact They can be Exact f r"-qt matches are

best. IfI have any doubt, I leave it alone 6784 ·· ·· ·· I can match a high with a low, or a low with a high, as Iona as the .!#/!:!? first match is separated from the second by at least one price bar .CJ?O The f; ~- i.lJ- J -~"~-1. ~f£by one to three ticks, but no more than that l i lj { G!i98 SUMMARY OF MAJOR ENTRY SIGNALS • The breakout of a Trading Range. • The breakout of a 1-2-3 high or low. • The breakout of a Ross Hook. eWlll8 PRIIHO ?568 • The breakout of a Ledge. 1T1i:"t"ii 1 . t 74F;7. -~~. 7Zfi9 .:mi .m~ c,,ro t.~~-~ E.?ll4 J K From left to right, I would take the first and second ledge breakouts, but not the third or fourth Thii is 1 -t because of the gap openings beyond I f11, t ~ • 1nit· ·tt1 1 my entry point. l . Not all ledges ~e sU1table for trading. I take only those in which there are no gap openings past the entry point. Note: some of these may occur concurrent with one another. Thats it! Four simple

patterns are all you need to trade seasonals properly . lJ un Congestion lI This last ledge was a ruce one. iM ,t. ~ f :• ~, I 1 ,4U- lt I 1~ 1~r In the figure above, I trade only an actual breakout of the Ledge. The breakout point is where I have drawn the line connecting two matching highs or two matching lows. This may not be the absolute high or low of the entire congestion on a chart of daily prices. 284 Since this may be the readers first contact with my writings, I must, for the sake of building a foundation, explain what various chart patterns are like, what congestion consists of, why congestion occurs, and how it looks. I will also be showing how to identify a trend. Being able to identify either congestion or a trend for the most part used to be sufficient. If a market was trending, then it was not in congestion If a market was in congestion, it was not trending. If you were not sure, then you stood aside until you were sure. 285 What Is Congestion? If we

have rules for defining congestions and trends, why do we need to examine the fundamental causes? Because as much as we would like to set rules about market action, the markets do not always accommodate our rules. Weve seen how congestion appears, but what is it? Why does it occur? When does it occur? Congestion is characterized by an area where prices move sideways. Prices move in a "Trading Range." There is a price zone of relative support, and a price zone of relative resistance. Support and resistance are usually readily seen at a price area that is tested or challenged more than once. Congestion is typified by alternating bars of lower-open, higher-close and higheropen, lower-close, as well as Doji bars. Technically, a Doji bar is a price bar having an equal open and close Congestion may be an area of neutrality of opinion. Congestion may be an area of equilibrium. Supply and demand are approximately equal, or in balance. Congestion may be an area of accumulation or

distribution. Why Congestion Occurs A number of reasons for congestion are described in the next few paragraphs. There are other reasons as well. Equilibrium: A balance between supply and demand may cause a market to move sideways in a Trading Range. This happens because at the lower price zone of the Trading Range, prices are perceived by some traders as being inexpensive, and buying takes place. At the upper price zone of the Trading Range prices are high enough that some traders are willing to take profits. To whom do they sell? To those traders who buy the market thinking that prices will go up even further. They are looking for a breakout. Why does their buying not cause the market to break out and go higher? 286 Because in addition to the selling by those who take profits, there is selling by those traders who feel the market has gone too high, they trade "resistance." Their selling defeats the buying by the breakout traders, and the market moves back down to the

lower price zone. At the lower price zone, the sellers who sold high buy back their short positions in order to take profits. From whom do they buy? From those traders who feel the market is now underpriced. Why doesnt the market continue down? Because in addition to the bargain shoppers, there will be traders who are buying "support." If more traders buy than sell, the market will begin to rise, thus prolonging the length of the Trading Range. One aspect of equilibrium then is profit taking, which in itself is a reason that markets congest. Profit taking: When a market has been trending for awhile, a point will be reached where accumulated profits in the trade are too tempting to be left in the market. Profit taking will result in a pause in the trend, at which point an active exchange between buyers and sellers v.ill take place Profit takers will be met by those eager to join the trend on a retracement. Accumulation and distribution: These phases of a markets price action

usually cause it to enter congested Trading Ranges. Those eager to accumulate a given tradable will buy when the price drops below their target, but stop buying when the price rises above what they perceive to be the "value area." The price will then have to drop to encourage new buyers. Those who want to distribute will sell, but only when the price is sufficiently high. Doubt: A market will tend to move sideways when traders are not sure concerning various fundamentals that affect a particular market. Uncertainty regarding whether there will be sufficient or excess rain or any early freeze may affect foodstuff markets. A threatened strike by gold miners in Africa or silver miners in Mexico may create doubt and cause those markets to move sideways. The threat of central bank intervention may cause currencies to move sideways. Divergence of opinion concerning a report to be issued can cause congestion in a market Confusion: When government policies affecting a market are not

clear, the market may move in a Trading Range. Conflicting government reports on the economy can cause markets to go into congestion. 287 Conflicting private or government weather reports, conflicting statements by governmental and quasi-governmental officials can cause a market to congest. Only at the far left of the chart do we see h-vo brief periods when the market trended for a few days. In general, anything that creates confusion or doubt may cause a market to stop Now we will take a closer look at some other charts and derive the definitions of trend and congestion. trending and congest before resuming an existing trend or changing direction and forming a new trend. Remember, if a formation is not congestion, then it must be a trend, and vice-versa. Lets begin by learning to visualize congestion. BP I I J A 19100 U11ere did the congest ion beg in? Visualizing Congestion ~1I fIiyj l What does congestion look like? How does it appear to the eye? Im going to show

you a series of charts, all of which, at least in some part, depict congestion GLtt,r:, rl)fX!HlIL,,,I " " M , ,I "" :;?1 ◄ ~ i?l:li! . ~=~~=~ · }ff}* t )1 1 1I lliiJ i1)il1[ I II . , 21i9J 2:li82 /If I tI I[ lit r f l ilii 1i, I ! 11 1 1! Ii I !111 I11 .~~~? jl ~~ 21i1J 21it~? I[ I ~,i~i I ~ (t/ tj 19001:l j I snhin it it began here, t 18:t!El 18000 18701:l 18600 j rt 1llS00 18480 // t/,/<-Upt:rend preceding congestion .18-~~ 21i314J 21i3132 18208 21i312~ 21317 18108 J.994 J.982 J.9~9 J.9~7 .1944 Above is a typical congestion or Trading Range. Begin looking carefully to see if you can spot where and why congestion began. How could you tell isually? Take a few minutes to think about this chart. It will help you to understand what follows .1932 1.5U9 J.91!6 .1891 fl . UU ~t .uu, . u;t Take note, if you will, that the congestion began while the market was still trending. Only by looking back can it be

seen that congestion began at the point I marked on the chart. . ,1,,,1-,,, .uu, . uu ••n~ The chart above shows nearly seven months worth of daily price bars. The entire chart is one big congestion, and contains numerous smaller congestion areas. 288 289 Defining Congestion One of the concepts I learned in the earliest years of my trading was how to know when I was in congestion. I was taught each of the concepts I will present, the most recent by my trader friend, Neal Arthur Muckler. Ill begin with that one CD J IJhere did con11estion be§in? I A 84311 8409 I slll>nit it be9an here. Illy? 838B 8367 831& 8325 8304 .82838262 Any time prices close on four consecutive bars, within the confines of the range of a single price bar and subsequent to that bar, you have congestion. This is regardless of where the highs and lows may be located The single price bar may be tenned a measuring bar. You will have to closely and carefully study congested areas.

Congestion can be very subtle in appearance. Often the difference between congestion or trend is the positioning of a single open or close. Now its time to review another way to know when we are in congestion. Any time we are not making higher highs and higher lows, or lower highs and lower lows, and we can see four alternating bars, at times coupled with inside bars, at times coupled with Dojis, we have congestion. Alternating bars are ones where prices open lower and close higher on one bar, and open higher and close lower on the next. Inside bars look like this: .8-2~ 8228 Ask yourself, "Why does ;ongestion begin there? Why not somewhere else?" How can one tell it began there? What are the characteristics of congestion? Was there any place on the chart where congestion ended? Why" See if you can anticipate how we will define congestion. 290 <- Insldo Bar 291 Dojis are bars where the open and close are at the same price or very near to the same price,

yielding a bar that looks like this: All9 conhfnatfon ot roW" of these is congesietion. The first bar of the congestion may very well be the last bar of what had been a trend. A congestion may look similar to any of the following, as long as it consists of four or more bars: l l l lrrr=:. This. too, is congestio11 A doji 111ay be used as a Con9•stion by Con9~,t:ion bu high-low Pilirs, ~i~~~:!i~!f:~. Mot.: tt doJi oan b• u:sH -s • wildc&J"d non-do.,ii !:i,ar:s c•n b consicl,a,e-d an• or tMM A combination of alternate closing high-low, low-high pairs is congestion. "Pointy" places made when the market is in congestion are not Ross Hooks. ""-lS"t a.s; ir:~i~!T":?.~!~ A doJi ~•the-r with a.m, cOMl,ination o£ on or- - conv••tion If th•r. -r• the- ,auch --,ioJi Ju1r11, auezonat• high-low wU-h 1:M otMr- ~ . Frequently congestion will start or end with a doji. Frequently congestion will begin or end with a

long bar move, or a gap. Another way to identify congestion is when you see M or W on the chart. The smallest possible number of bars that can make up this formation is four. Lets see how this can be done. 292 293 Uhat we have here is an open higher close lower, followed. by on open lower close higher, followed by a.n open higher close lower, followed by an open lower close higher sequence This foNIIS a. /V Idea lized ,1,1 •s and 11Js ~~/ ·····i,· . ~ : close lower sequence. This for111s an lV, . Here we hauean anopen openhigher lower close close higher, followed~ lower, Collowed ~ an open louer close higher, followed by an open higher r· If we were to get a formation that looked like the following, the Ross Hook would be as marked. If that Hook is taken out, we would want to be long Notice that the bar that created the Ross Hook was the last bar of the trend and the first bar of the congestion. Rh F~ t1!ll In reality, we may get something that looks more

like the following: I )I r·••-, ·•••· r· ~ What we ha1Je here is an open higher close lower, to lowedhigher by an open close higher, rollowed an Iop.!ln closelower lower, followed by an open by ·1 r· . , ·-· , -·- ~ ,, w llli The Ross hook were interested in occurred at the high just prior to congestion, 1 1 !"" j""i followed by an cpet1 hi9her close lower-, followed by Here we haue openhig-ha:r. lower close higher, iln open lOYeran close followad l,v an opan higher close lower sequence . Th is fortllS an ,v-,. 294 295 The Ross Hook is as marked below. Rh 2 Rr ·) i t)jl ll1 Now, lets see if youre really getting this. I )j l ij1Itj ,<c ct!rection A l-Z-3 follOll8d 1,y • Rh, when oc.-lns 111 ccmgestlon, gives a new m. The, 10t sape!"ce,iln A takln,r - t berth the • 1, 1111, ., tha .,, u ot tlle new Rh wou14 be a tH4abla e - t . l lIJ1JI t 0. l l11 2 1 ~f 1 ! There is a second Boss hook forMed

during the congest ion , Do you know where it is, and uhy it is a Ross hook? 3 Note: A 1-2-3 followed by a breakout of the #2 point, that subsequently results in a Ross Hook, supersedes any congestion, or previous Ross Hook. The price bar labeled "b" made a new local low. The take out by prices of the local double resistance, "a" and "b", is a significant event. "a" and "b", together, constitute the number two point of a 1-2-3 low occurring in congestion The new Ross Hook represents an even more significant breakout point. Combined with the old Rh, there is significant resistance, and within a few ticks, the two constitute a double top. lf prices take them both out, you would normally expect a relatively longer term, strong move up I use the term "relatively" here, because the intensity and the duration of the move would be relative to the time frame in which the price bars were made. Obviously such a move on a one minute

chart would hardly compare with an equivalent move on a daily chart. While we are looking at the chart, there is something else of importance to notice. Prices retreated from the resistance point, thereby creating the second Ross Hook. 296 297 This represented a failure to break out. This failure is why Reverse Ross hooks are important. Dft 7188 Now, lets give you a brief review of the various congestions. All of the three following conditions that define congestion must occur without consistently making higher highs or lower lows. . 7919 6938 . 6857 Congestion by Opens/Closes: Four consecutive closes or opens within the range of a measuring bar. 67?6 . -~~% Congestion by Combination: A series of four consecutive dojis, or at least one doji and any three alternating bars. The doji is a wild card and can be used to alternate with any other bar. If there are three non-doji bars, one of them must alternate highto-low with the other two non-doji bars --~~t 6533

--~Congestion by Alternation: A series of four consecutive alternating open high close low, open low - close high bars in any sequence. This definition includes Congestion by High/Low pairs. 6371, r,299 Congestions are supposed to have a beginning. At times they can continue quite a long while before they have an end. It is just as important to be able to identify the end of congestion as it is to identify the beginning. When congestion ends, a new trend may be born. Sometimes the market just quickly moves to a new congestion area. That is what we are seeing more of now - periods of extended congestion alternating with sudden explosions and collapses of price If you have studied in detail the previous charts in this section, perhaps you are beginning to see how I define congestion. For purposes of trading as shown in this course, I define congestion as the absence of trend. 298 299. Defining A Trend JI I SF l A J n., Swiss Flanc:: was illnast like the D-Marl1 011 the

pr11vfOlls Ghilrt, lheNI wa.a a pricJP uptNmd. leadi11g to congestion Iue nuked tJle uptrend. Where lid congestion llegin and end? 7943 11 I {t { J A This chart does not sl,011 you whele congestion began. The -rket ls ln congestion lroJo the beginning of the char-t. But where, tr any place did congestion end? Is" neu tr-end beginning? f dI fl t 8891!1 ·--~.~~­ --~~- ---~ 7921!1. 783& . 7886 7729 . 7852 . ?!11:!i .Th?~ 7784 .7515 7758 7408 7301 I am going to show you a new way to define a trend. This is not in conflict with my other writings, rather it is in addition to them. 7194 . 78137 6980 Including the first bar, if you said it began with the ninth bar from the left you were correct. Including the lastbar, if you said congestion ended with the eleventh bar from the right, you were right again. In a moment you will see why So much for the suspense. The next few charts will reveal what I see that helps me define both trends ·and

congestion areas. Remember, for this exercise it can be one or the other, but not both. 300 Including the last bar, congestion ended with the seventh bar from the right. Why? A new trend is beginning. Why? The seventh bar from the right is the fourth successive bar that has closed higher than it opened. A trend is being born. Following a turning point (five bars prior to the seventh bar) four successive bars that close higher than they open indicate a trend being born. But what of the bars following that seventh bar from the right? We have three correcting bars followed by a breakout bar. The breakout bar defmes the trend. It took out the high of the fourth bar that closed higher than it had opened A new trend has been born within the old congestion. There is no guarantee as to the probable duration of this new trend. Nevertheless, for purposes of this book a new trend has started, it has been defined. It remains to be seen whether this new trend will break out of the old

congestion. Later well see what all this means and how we can trade it. 301- I J J Now hara is a chart that is a bit more diffieult. II you can 11at this one, you are well on your way to becominc a much better trader than you pre~antly 111 " J 3557 are. Jl 11j[1 Give it. try, rllhelp you on the follUWDIII paces. ttj~ ftI t ( l 1 +l } j j Look at the relatio~ship ~tween ~e opens and the closes on the Gold chart. They are mostly alternatmg, with occasional bars (Dojis) where the open and the close are the same. ~ere is not a single s~ries of four or more bars fll!£!: a turning point, where there 1s a steady progression of closes higher than opens to signify the birth of an uptrend, nor a single progression of opens higher than closes signifying a downtrend bemg born. The first rule of an emerging trend is that there must be at least a series of four closes higher than opens, or a series of four closes lower than opens, following a tuming point (some call them

pivot points) in order for a trend to be considered as emerging. w:iiat ~onstitutes a turning point! Looking back you see that the market has c~ged direction. It may be a correction in process, but the market 1s no longer gomg in the same direction. I dont know how to predict turning po~ts, but I can see them ~hen I look at what has happened. When I say afler a tummg pomt, I mean the pivot bar cannot be counted in the progression. A turning point would have been a Ross Hook in the prior trend, or is near the extreme of a Trading Range, or could also be either a #1 or #3 point. 302 11?08 11~~ ~ t JIJ 1 r tJ hr r -~~~ 112i~ .in~ )~ J11 t~ I 11l81!6 Ba very, very honest, and very careful. Hint From be&inning to and there are Giree trends trymg to be -~~ bom. One of them made it and teaches us a new nile Another made it accordina to the orilPJlal nile. One !~ other, as far as this chart is concerned never made it, ~ "· ······ and so the rest of the chart is

cona;estion. Lets look at this chart and learn a new rule. The rule is, that if subsequent to a turning point, there are three successive open-lower, close-higher bars followed immediately by a gap up opening beyond the Trading Range of the previous bar, or three successive open-higher, close-lower bars followed immediately by a gap down opening beyond the Trading Range of the previous bar, a trend is attempting to emerge. Once again, this must occur after the turning point We now have two rules that show the birth or emergence of a trend out of congestion. Lets repeat them: 1. Subsequent to a turning point, four successive open-lower, close-higher bars, or four successive open-higher, close-lower bars, mean a trend is attempting to emerge. 2. Subsequent to a turning point, three successive open-lower, close-higher bars followed immediately by a gap up opening beyond the high of the previous bar, or three successive open-higher, close-lower bars followed immediately by a gap down

opening beyond the low of the previous bar, mean a trend is emerging or being born. 303 . Under either rule the emerging trend is not yet defined. We cannot say the trend is defined unless and until the highest high of the emerging trend is taken out in an upmove, or the lowest low of the emerging trend is taken out in a down-move. When the appropriate breakout has taken place, we have a defined trend. Ive also labeled the successor to the defined trend. We will call it an established trend An established trend takes place when there is a correction subsequent to a defmed trend When the extreme of the defmed trend is taken out, we then have an established trend. In a falling market: • Subsequent to a turning point, four successive closes lower than the opens = emerging trend. • Subsequent to a turning point, three successive closes lower than the opens, followed by a gap down open beyond the low of the previous bar = emerging trend. • The breakout of the low of an emerging

trend = defined trend. IIQ .J I I J A 1:1798 J!~~~ • The breakout of the low of a defined trend = established trend. 11◄A7. o~~ I J fl 4%55 .m~~ .1~?~ .te~ .~~~~ .1~ ., fill J~~ 4133 .1-~~ 3977 ,;~~~ 1821B 3818 In a rising market: Now lets learn some other rules: • Subsequent to a turning point, four successive closes higher than the opens = emerging trend. • Subsequent to a turning point, three successive closes higher than the opens, followed by a gap up open beyond the high of the previous bar = emerging trend. • The breakout of the high of an emerging trend = defined trend. • The breakout of the high of a defined trend= established trend. 304 3. A correction can last no more than three bars Four bars marks either congestion or the birth of a trend in the opposite direction. A correction in an uptrend is any failure by prices to make a new high. A correction in a downtrend is any failure by prices to make a new low. 4. Once a trend is

defined, it requires at least four non-trending bars to break the trend, i.e, four or more bars in which the trend fails to continue, either by virtue of congestion or correction. 305 5 . An uptrend is defmed when the highest high of an emerging trend is taken out or violated. A downtrend is defined when the lowest low of an emerging trend is taken out or violated. 6. An uptrend is established when, after a reaction or even a sideways hesitation (Ledge), the high of the defined uptrend is taken out or violated and the trend continues. A downtrend is established when, after a reaction or even a sideways hesitation (Ledge), the low of the defined downtrend is taken out or violated and the trend continues. Combining Rules 5 and 6, a trend is first defmed, and later established. A defined trend puts us on alert. An established trend is a tradable event If we know how to identify an emerging trend, then by default we know how to identify congestion. Anything that is not a trend must, by

definition, be congestion. However, congestion can also be defined on its own terms, for fundamental reasons, as described earlier. I I I J A 1255 . 4199 .4144 Appendix B Decision Tables In several places throughout the text, I mentioned the fact that you can get professionally researched data on seasonality. I asked Moores Research Center for permission to reproduce their seasonal tables so that you could see first hand the format of what I am able to see when I look for seasonality in a trade. The following pages contain examples of the Moores Research Decision Tables. All tables show a fifteen year history The top section of the tables is explained below The bottom section of the tables is explained at the end of this Appendix . 41188 41133 1. The Contract Year 3977 .~??1, ;18.6,~ 2. The Optimized approximate Entry Date 3. The theoretical Entry Price for that Entry Date 3818 .~?~~ 3700 4. The Optimized approximate Exit Date 5. The theoretical Exit Price for

that Exit Date 6. The theoretical Profit Amount had you entered on the Optimized Entry Date and exited on the Optimized Exit Date. 7. The Best Equity Date, which represents the date for each year on which the trade had the greatest amount of unrealized paper profits. 306 307. . ::€ o;:E: $0 ec:l OC1> Et-- . a- <l:j~ :,,.0 00 r+,;;l nm t:I g~ 8 e,o =· &;~ o.tT1 =· "O,t:l ~ 0 gi ~ ~~ t:rO g"ci° i·i ~-a "" e. • E:i-O. •• n~ 0 a. "" i• t:r -olo -~ o.cil (I) i;. Oil,~-Cl) ,. (I) O QC/l ,, ~~ CD ~ gm -· Cl) I»~ w =3~ ;:lo 1= ost $ CD 0~ -!a u, :3o o.i; $"0 (1)0 ~s: le o ~· I» CD 0" !l"O cil u, g fil" g- e.8 g g 0. CD ~ ~~ ~-e: .! § g- g st t:r= CII a Cl)~ 1! ~~ ~ ~ ~ ~o. a Ja ~ ~- . CD CII Cl) 9- "-- §- ". 0 e?. 21 6 " e: " ~ ~- 0 a 0 g, A Decision Table Showing a history of the September

D-Mark/B-Pound spread allll!I Buy Sep 95 Deut~tlle l/11rk(IMM) I Sell Sep 95 British Pound (/MM) Enter on approximately 05/26 - Exit on approximately 06/20 c., 0 (0 1992 05126192 -35875 -350.00 05128191 -34463 06/19/92 06/20191 -36225 1991 -31725 2737.SO 1990 1989 05/29190 05/26/89 -29238 .j4725 06/20190 06/20/89 -31425 -31725 -2187.50 3000.00 BEST EQUITY DATE 06/20194 06/04193 09/03192 06/18/91 06/04190 06114/89 CONT ENTRY YEAR DATE ENTRY PRICE EXIT DATE EXIT PRICE PROFIT AMOUNT 1994 05/26194 -18438 06/20194 -17875 562.50 1993 05/26193 -20237 06/18/93 -19275 962.50 BEST EQUITY AMOUNT 562.50 2600.00 800.00 3387.50 WORST EQUITY DATE 375.00 3287.50 WORST EQUITY AMOUNT 06/08194 -1025.00 06/18/92 -387.50 06/20190 -2187.50 -7S.OO -1706.25 1988 05/26/88 -42238 06/20/88 -39350 2887.50 06/06/88 3887.50 05/27188 1987 05/26187 -31575 06/19/87 -31325 250.00 05/27187 643.75 06112/87 1986 05/27186 -37838 06/20/86 -37025

812.50 06/04186 1031.25 06/11/86 -181.25 1985 OS/28/85 -36856 06/20/85 -38169 -1312.50 06/05/85 131.25 06/18/85 -2356.2S 1984 05/29/84 -40769 06/20/84 -40169 600.00 06/20/84 600.00 06/01/84 -37.20 1983 05/26/83 -49381 06/20/83 -46075 3306.25 06/15183 3718.75 05131/83 -65625 1982 05/26182 -58331 06/18/82 -57800 531.2S 06/17182 793.7S 06/07/82 -1281.25 1981 05/26/81 -7702S 06/19/81 -71938 5087.50 06/05/81 8031.25 05127/81 -212.SO 1980 OS/27/80 -74425 06/20/80 -72425 2000.00 06/03/SO 4281.25 Percentage Correct Average Profit on Winning Trades Average Loss on Trades Average Net Profit Per Trade 80 Protective Stop 1894.79 1894.79 -1283.33 -1283.33 1259.17 1259.17 (1637) Winners 12 Losers Total Trades IS 3 HYPOrnETICAL OR SIMULATED PERFORMANCI! Rl!SULTS HA VE CERTAIN INIIERl!NT LIMITATIONS. UNLIKE AN AC11JAL PERFORMANCE RECORD, SIMULATED RE SULTS 00 NOT REPRl!SEITT AC11JAL TRADING. ALSO SINCE 11!E TRADES HAVB NOT

AClUALL Y BEEN EXECl111lD 11!E RES ULTS MAY HAVB UNDER- OR OVER-COMPENSATI!D FOR THE IMPACT IF ANY OF CERTAIN MAR.KET FACTORS, SUCH AS LACK OF LtQtnDITY SIMULATED TRADING PROORAMS IN GENBJlAL ARE ALSO SUBJECf TO 1HE FACT lllAT lllBY ARE DESIGNED WITH THE BRNEm OF HINDSIGHT. NO REPRESENTATION IS BRING MADE THAT ANY ACCOUNT WILL OR IS LIKRLY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO TIIOSB SHOWN SIMlnATIID kESULTS DO NOT NBCBSSAIUL Y 1MPL Y FUTURE PROFITS. 11!E RISK OF LOSS IN TRADING COMMODITY CONTRACTS CAN BE SUBSTANTIAL YOU SHOULD THEREFORE CAREFULLY CONSIDllR WllllTIIER SUCH 1RADING IS SUITABLE FOR YOU IN LIGHI OF YOUR FINANCIAL CONDITION. RESIJL TS NOT ADJUSTBD FOR COMMISSIONS AND SLIPPAGE g-8 s.,~ -o, oo . 89 ~9 a19 §c» in Ere» A Decision Table Showing a history of the June/December Eurodollar spread Ica M= Rcscardl Center, Inc. ~Center. I Buy 11111 95 Eurodol!ar(lil/.l/) /Sell Dec 95 Eurodollar(JJJM) Enter on approximately 03/04 - Exit on approximately 04/28 CONT

YEAR ENTRY PRICE ENTRY DATE EXIT DATE EXIT PRICE PROFIT PROFIT AMOUNT BEST EQUITY DATE BEST EQlITTY AMOUNT WORST EQUITY DATE WORST EQUITY AMOUNT 1994 03/04194 0.82 04128194 1.17 0.35 875.00 04/18194 107S.OO 03111194 -100.00 1993 03/04193 0.50 04128193 0.52 0.02 50.00 0311S/93 6S0.00 04/22193 -1S0.00 1992 03/04/92 1.03 04128/92 1.06 0.03 75.00 03/20/92 775.00 04/09/92 -S00.00 1991 03/04/91 0.61 04126191 0.75 0.14 350.00 04122191 62S.OO 03/05/91 -S0.00 1990 03/05/90 0.29 04/?,7/90 0.49 0.20 500.00 04127/90 500.00 03120/90 -17S.OO 1989 03/06189 --0,18 04128189 --0.06 0.12 300.00 03131/89 1075.00 03/10/89 -75.00 1988 03/04188 0.50 04/28/88 0.62 0.12 300.00 04128188 300.00 1987 03/04/87 0.11 04128/87 0.58 0.47 117S.OO 04/24/87 1400.00 03/27187 -325.00 1986 03104/86 0.17 04128/86 0.12 -0.05 -125.00 03/07/86 250.00 04110/86 -375.00 -100.00 c,J . 1985 03/04185 0.89 04126/85 1.23

0.34 850.00 04/26/85 850.00 03/06/85 0 1984 03/05/84 0.66 04/27/84 I.OJ 0.35 87S.OO 04/24/84 975.00 03/08184 -25.00 1983 03/04183 0.48 04/28/83 0.50 0.02 50.00 04/18/83 300.00 03/2S/83 -400.00 Percentage Correct 92 ~verage Profit on Winning Trades IAverage Loss on Trades Average Net Profit Per Trade Protective Stop 0.20 490.91 -0.0S -125.00 0.18 439.S8 (571) Winners Losers Total Trades II I 12 HYPOTHETICAL OR SIMULATED PERFORMANCE RBSULTS HAVE CERTAIN INHBRBNT LIMITATIONS. UNLIKE AN AClUAL PllRFORMANCE RECORD SIMULATED RESULTS DO NOT REPRESENT ACTIJAL TRAf.>fNO ALSO SINCE TIIE TRADES HAVE NOT ACTUALLY BEHN EXECUTED THE RESULTS MAY HAVE UNDER, OR OVER-COMPENSATBD FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS. SUCH AS LACK OF LIQUIDITY SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO TIIB FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE 111AT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE

PROFITS OR LOSSES SlMTLAR TO lllOSB SHOWN SIMULATED RESULTS DO NOT NECESSARILY JMPLY Fll11JRE PROFITS. THE RISlC OF LOSS IN TRAOlr,((I COMMODfTY CONTRACTS CAN BE SUBSTANTIAL YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING JS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. REStnTS NOT ADJUSTED FOR COMMISSIONS AND SLIPPAGE A Decision Table Showing a history of the May Feeders/August Fat Cattle IA IA Moon, ResearchCentcr,lnc =~Center, Inc I Buy .llay 95 Feeder Cattle (Cl!E)/Sell Aug 95 Uve Cattle(CMI:] Enter on approximately 04/30 - Exit on approximately 05/14 ENTRY DATE CONT YEAR -~ c,J ~ ENTRY PRJCE EXIT DATE EXIT PRJCE PROFIT AMOUNT BEST EQUITY DATE BEST EQUITY AMOUNT 1994 05/02/94 11295 05/13/94 11040 -255.00 1993 04130/93 13477 05/14/93 13775 298.00 1992 04/30/92 10910 05114/92 11722 812.00 05/14/92 812.00 1991 04130/91 14420 05114/91 15205 785.00 05/()8/91 957.00 1990 04/30190 12665 05/14/90 13387 722.00 05/11190

11)81) 05/Cll/Rl 111110 115112/8) I IJl7 JH7.00 0~/12/KQ 1988 05102188 12290 05113/88 12705 415.00 05/13/88 415.00 1987 04/30187 9380 05114/87 10300 920.00 05/14/87 920.00 1986 04/30186 5957 05/14/86 6760 803.00 OS/13/86 1045.00 648.00 05114/93 WORST EQUITY DATE WORST EQUITY AMOUNT 05/10/94 -498.00 05/04/92 -385.00 777.00 OS/01/90 -158.00 JH7.00 05/01/119 -R5.00 05105/87 -220.00 05/09/84 -915.00 298.00 1985 04130185 6627 05/14/85 9642 315.00 05/10/85 1984 04/30184 6367 05114/84 6392 25.00 05114/84 25.00 1983 05/02/83 7355 05/13183 7742 387.00 05/13/83 387.00 1982 04130/82 7410 05/14/82 7427 17.00 05/06/82 240.00 05112/82 -213.00 1981 04/30/81 6375 05114/81 6890 515.00 05114/81 515.00 05/05/81 -635.00 1980 04/30/80 7602 05114/80 8892 1290.00 05/12/80 Percentage Correct ~verage Profit on Winning Trades ~ verage Loss on Trades ~verage Net Profit Per Trade 93 1728.00 Protective Stop

Winners 549.36 549.36 -255.00 -255.00 Losers 49S.73 49S.73 Total Trades (644) 14 I IS HYPOTIIBTICAL OR SfMULATED PERFORMANCE RBSULTS HAVE CERTAllI INHERENT LIMITATIONS UNLIKE AN ACTIJAL PERFORMANCE RECORD. SIMULATED RE SULTS DO NOT REPRESENT AcroAL TRADINO. ALSO SINCE TIIE TRADES HAVE NOT AcroALLY BEEN EXl!ClJTBD 11lll RESULTS MAY HAVE IJNllER OR OVl!RCOMPENSATl!D FOR Tim IMPACT !F ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN OENERAL ARE ALSO SUBJllCT TO TIIE FACT THAT TIIBY ARE DESIGNED WITH TIIB BENEFIT OF HINDSIGHT NO RBPRESBNTATION IS BEING MADE nlAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSBS SIMILAR TO lllOSE. SHOWN SIMULATBD RESULTS DO NOT NECESSARILY IMPLY FU11JRE PROFITS. THE RISK OF LOSS IN TRADING COMMODITY CONTRACTS CAN BE SUBSTANTIAL YOU SHOULD nlERBFORB CAREFULLY CONSIDER WHETIIER SUCH TRADING IS SUITABLE FOR YOU IN 1.IGHT OF YOUR FINANCIAL CONDmON RESULTS NOT ADRJSTBD FOR COMMISSfONS AND SLIPPAGE A

Decision Table Showing a history of the December Gold/Silver spread I[A M00<e Research ~ c h Center. Inc I Buy Dec 95 Gold(Cl/X)!Se/1 Dec 95 Silver(CHX) Enter on approximately 06/11 • Exit on approximately o6ns CONT YEAR c.> . N ENTRY PRICE ENTRY DATE EXIT EXIT DATE PRICE PROFIT AMOUNT BEST EQUITY DATE BEST EQUITY AMOUNT WORST EQUITY DATE WORST EQUITY AMOUNT 1994 06/13/94 11645 06/28/94 12355 710.00 06/27/94 795.00 06/15/94 -350.00 1993 06/11/93 15725 06/28/93 15320 -405.00 06/18/93 30.00 06/25/93 -415.00 1992 06/11/92 13705 06/26/92 14515 810.00 06/26/92 810.00 1991 06/11/91 14840 06/28/91 14945 105.00 06/26/91 195.00 06/13/91 -140.00 1990 06/11/90 10745 06/28/90 11270 525.00 06/25/90 685.00 06/12/90 -90.00 1989 06/12/89 10140 06/28/89 11210 1070.00 06/23/89 1070.00 06/16/89 -85.00 1988 06/13/88 9915 06/28/88 10025 110.00 06/24/88 425.00 06/20/88 -635.00 1987 06/11/87 6620 06/26/87 l0110

3490.00 06/22/87 3745.00 1986 06/11/86 8080 06/27/86 9750 1670.00 06/27/86 1670.00 1985 06/11/85 555 06/28/85 985 430.00 06/28/85 430.00 06/18/85 -255.00 1984 06/11/84 -6260 06/28/84 -4995 1265.00 06/27/84 1530.00 06/12/84 -205.00 1983 06/13/83 -18800 06/28/83 -16215 2585.00 06/28/83 2585.00 06/23/83 -1120.00 1982 06/11182 2870 06/28/82 4330 1460.00 06/21/82 2450.00 1981 06/11/81 -5750 06/26/81 -2845 2905.00 06/26/81 2905.00 06/12/81 -800.00 1980 06/11/80 -20450 06/27/80 -17930 2520.00 06/23/80 3730.00 06/13/80 -850.00 Percentage Correct 93 Protective Stop Average Profit on Winning Trades 1403.93 1403.93 Winners Average Loss on Trades -405.00 -405.00 Losers Average Net Profit Per Trade 1283.33 1283.33 Total Trades (1668) 14 I 15 HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTIJAL PER> ORMANCE RECORD SIMULATED RESULTS DO NOT REPRESENT 0 ACTUAL

TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTIJALLY BEEN EXEClITED THE RESULTS MAY HAVE UNDER OR OVER--COMPENSA11ID FOR 11iR IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY SIMULATED TRADING PROORAMS IN GENERAL ARE ALSO SUBJECT TO TIIE FACT THAT TIIEY ARE DESIGNED WITH TIIE BENEFIT OF HINOSIO!iT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO TIIOSE SHOWN SIMULATliD RESULTS DO NOT NECRSSARIL Y lMPL Y FlmJRE PROFITS. THE RISK OF LOSS IN TRADING COMMODITY CONTRACTS CAN BE SUBSTANTIAL YOU SHOULD THERRF0RE CAREFULLY CONSIDER WHBTIIBR SUCH TRADJNO JS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION RE SULTS NOT AOIDSTBO FOR COMtdISSlONS AND SLIPPAGE. A Decision Table Showing a history of the September J-Yen/B-Pound spread [I IA Moon, Research Ccn~. Inc :::ch I Buy Sep 95 .Japanese le11(/ll H) /Sell Sep 95 Britih Po1111d (IJlll) Enter on approximately 05/21 - Exit on approximately 06/25 CONT YEAR

c.> . c.> ENTRY DATE EN1RY PRICE EXIT DATE EXIT PRICE PROlIT AMOUNT BEST EQUITY DATE BEST EQUITY AMOUNT 1994 05/23/94 26763 06/24/94 28250 1487.50 06/21/94 2600.00 1993 05/21193 17575 06/25/93 26063 8487.50 06/25/93 8487.SO 1992 05/21/92 -15763 06/25/92 -17100 -1337.50 06/02/92 1991 05/21/91 -16138 06/25/91 -10888 5250.00 06/20/91 1990 05/21/90 -21700 06/25/90 -25962 -4262.50 05125/90 WORST EQUITY DATE WORST EQUITY AMOUNT 06/06/94 -1287.50 1862.50 06/24/92 -1475.00 5262.50 05/28/91 -1087.50 2000.00 06/25/90 -4262.50 06/15/89 -I 187.50 -381.25 1989 05/22/89 -8100 06/23/89 -5975 2125.00 06/23/89 2125.00 1)88 05/2]/88 -152lMI OM24/K8 ·107llll ,JSIHUKI 1)(,/2)/88 450(1.00 1987 05/21/87 -14888 06/2S/87 -14S19 368.75 05/27/87 2518.75 06/12/87 1986 05/21/86 -19138 06/25/86 -18688 450.00 06/20/86 1250.00 06/02/86 -400.00 1985 05/21/85 -28413 06/25/85 -29137 -725.00 05/24/85 1356.25

06/18/85 -1637.50 1984 05/21/84 -33188 06/25/84 -31631 1556.25 06/25/84 1556.25 1983 05/23/83 -44150 06/24/83 -43650 500.00 06/22/83 1481.25 06/09/83 -3212.50 1982 05/21/82 -59150 06/25/82 -58700 450.00 06/25/82 450.00 06/07/82 -1775.00 1981 05/21/81 -74094 06/25/81 -66450 7643.75 06/05/81 8950.00 05/27/81 -181.25 1980 05/21/80 -87669 06/25/80 -86581 1087.50 06/03/80 3087.50 05/28/80 -1556.25 Percentage Correct Aversge Profit on Winning Trades Aversge Loss on Trades Average Net Profit Per Trade 80 Protective Stop 2825.52 2825.52 -2108.33 -2!08.33 1838.75 1838.75 Winners Losers Total Trades (2390) 12 3 IS HVPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN AcnJAL PERFORMANCE RECORD, SIMULATED RESULTS 00 NOT REPRESENT ACTUAL TRADING ALSO, SINCE 111E TRADES HAVE NOT ACTUAU~ Y BEEN EXECUTED nm RESULTS MAY HAVE UNDER- OR OVER-CX>MPENSATED FOR J1fE IMPACT. IF ANY, OF CERTAIN MARKET

FACTORS, SUCH AS LACK OF I.IQUIOJTY SIMUlATED TRADING PROORAMS IN GENERAL ARE ALSO SUBJECT TO l1IB FACT 11-IAT TIIEY ARE DESIGNED Wlnl THE BENEFIT OF IIINUSJGIIT. NO RrlPRESENTATION JS lmlNG MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACIIIEVE PROl-JTS OR LOSSES SIMILAR TO THOSE SHOWN SIMULATED RESULTS DO NOT NECESSARll. y IMPLY FlII1JRE PROFITS, 11-IE RISK OF LOSS IN TRADING COMMODITY CONTRACTS CAN BE SlJBSTANTIAI YOU SHOULD THERliFORE CAREFULLY CONSIDER WHETIIBR SUCH TRADING IS SUIT ABLE FOR YOU IN umrr OF YOUR FINANCIAL CONDITION RESULTS NOT ADnJSTED FOR COM!vllSSIONS AND SLIPPAGE. A Decision Table Showing a history of the April/August Live Cattle spread & Buy Apr 95 Live Cattle(CME)/Se/1 Aug 95 Live Clltt/e(CME) Moore Research Center, Inc. Enter on approximately 03/17 • Exit on approximately 04/07 • Caution: This Trade Enters Deliverable Period ENTRY PRICE ENTRY DATE CONT YEAR EXIT DATE EXIT PRICE DEST EQUITY DATE PROFIT PROFIT AMOUNT BFST EQUITY AMOUNT

WORST EQUITY WORST EQUffY DATE AMOUNT 03/17/94 3.60 04/07/94 5.00 140 560.00 04/07/94 560.00 O.i/21/94 1993 03117/93 9.00 04/07/93 9.13 0.13 52.00 03124/93 360.00 04/02193 -240.00 1992 03/17/92 8 40 04/07192 10.00 l.60 640.00 04107/92 640.00 03/20192 -208.00 1991 03/18191 6.85 04/05/91 7.25 0.40 160.00 04/03/91 220.00 03/20/91 -300.00 l990 03/19/90 5.53 01A)(,/90 6.75 1.22 488 04/06/90 488.00 03/27190 -392.00 1132.00 [JI) 1989 03117/89 6.40 04/07189 9.23 2.83 1132.00 04/07/89 1988 03/17/88 6.05 04/07188 7.17 1.12 448.00 04/05/88 1987 03/l 7/87 6.45 04/07/87 8.98 2.53 l012.00 04/07/87 1012.00 732 001 -6u 03/22/88 I -88 00 I -148.00 440.00 1986 03/17/86 1150 04/07186 0.88 0.38 152.00 03/25/86 260.00 03/18189 (;) I 1985 03/18/85 -2.95 04/04/85 -155 140 560.00 04/01/85 900.00 03/20/85 .j::, I 1984 03/19/84 5.75 04/06/84 6.58 U.83 332.00 04105/84 432.00 03/21184 J I

. ool 1994 l 983 03/17/83 1.62 04/07/83 6.27 4.65 1860.00 04/07/83 1860.00 1982 03/17/82 4.63 04/07/82 7.72 3.09 1236.00 04/07/82 1236.00 03/22/82 1981 03117/81 -4 48 04/07/81 -6.43 -1.95 -780.00 03123/81 112.00 04/07181 1980 03/17/80 -138 04/07/80 -105 0.33 132.00 03131/80 13200 03/25/80 IPercentage Correct 93 verage Profit on Winning Trades vcragc Lo::.:-; on Trades 1.56 626.00 -1.95 -780.00 1.33 532.27 vcrngc Net Profit Per Trade -128 00 -80.00 -780.00 -288.00 Protective Stop I (602) Winners I 14 I 15 Losers Total Trades RECORD, SIMULATED RESULTS IX> NOT REPRESENT HYPOTHETICAf. OR SIMULATED PERFORIIANCE RESlR,TS 111VE CERTAIN INHERENT I !MITATJONS UNLIKE AN ACTUAL PERFORll,tANCE OVER.<SOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN ACTUAL TRADING. ALSO, SINCE nm TRADES HAVE NOT Acn:AtLY BEEN EXECUTED THE RESULTS MA y HAVE I f!1DER- OR MARKET FACTORS, SUCH AS LACK OF LIQUIDITY SIMULATED TRADING lROGRAMS IN (iENERAl

ARE Al.SO suum:T TO Tllb l•/l("T 11-IAI TIIEY ARE l)J:SIGNED W!Tll TIIE BENEFir If SIMILAR TO THOSE SHOWN. SIMULATED RESUITS DO NOT HINDS!Gl-IT NO REPRESENTATION IS BEING M.ADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SHOULD lHEREFORE CAREFULLY CONSIDER VHETHER SUCH NECESSARILY IMPLY FUfURE PROFITS THE RISK OF LOSS 1~ TRADING COMMODITY CONTRACTS CAN BE SUBSTANTIAL YUU SLIPPAGE. AND CONfMISSJONS FOR TRADING JS SlJITABLE FOR YOU IN 1.11-i! ff OF YOUR FINANCIAL CONDITION RESULTS NOT ADJUSTED • :-.{oore Rese~rch Center. Inc CONT YEAR ·, A Decision Table Showing a history of the October Fat Cattle/May Feeders spread Buy Oct 95 Live Cattle(CME)/Sel/ May 95 Feeder Catt/e(CME) Enter on approximately 03/10 • Exit on approximately 04/28 I ENTRY DATE ENTRY PRICE EXIT DATE PROFIT AMOUNT EXIT PlUCE I BEST EQUITY DATE llFST EQUITY AMOUNT WORST EQIBTY DATE WORST EQlnTY AMOUNT 04/28/94 .lQ,190 565.oo I 04/28/94 565.00 04/05/9-1 -197 00 l 994

I 03/10/94 -11055 19931 03/!0/93 -13102 04/28/93 -13017 85.001 04112193 530.00 03/23/93 -108.00 19921 03/!0/92 -IU830 04/28/92 -10687 143.oo I 03121192 375.00 04/09/92 -577.00 19911 03/ll/91 -13305 04/26/91 -13697 -392 001 03/!3/91 268.00 04/05/91 -512.00 19901 03/!2/90 -I I 525 04/27/90 -11427 98 oo I 04104190 515.00 04/!6190 -267.00 19891 03/10/89 -I 1655 04/28/89 -10580 1075.UUJ 04/27/89 1333.00 03/27189 -852.00 590 00 I IM/l 5/88 l 195.00 03/15/88 -271100 03/13/87 300.00 03/25/87 -635.00 03/12/89 -12 00 l 9881 03/10/88 -12955 04/n/88 -12365 19871 03/10/87 -9490 04/28/87 .9217 2noo I 19861 03110/86 -8625 04/28/86 -5817 2808.001 03128/86 2808.00 04/26/85 -7392 2300.00 04/25/85 2370.00 (;) . 19851 03/11/85 -9692 01 1984 I 03/!2184 -8630 04/27/84 -7270 1360.00 04127/84 1360.00 19831 03/10183 -9680 04/28/83 -8680 1000.001 04/22/83 1618.00I 03/!6/83 -67.00 I 982 I OJ/l 0/82

-8370 04/28/82 -8097 273.00 I 04119/82 638.oo I 114/06/82 -410.00 1981 I 03/10181 -9220 04/28/81 -8007 1211.001 03120181 1698 001 03/!2/81 -62.00 04n8/80 -8845 3787.001 04128/80 3781.001 03/11180 -240.00 1980/ 03/10180 -12632 Percentage Correct Protective Stop 93 1112.14 1112.14 Winners IAvcrugc l.oss 011 Trudcs -192.00 -192.00 I,oscrs !Average Net Profit Per Trade 101187 101187 Total Trades verage Profit on Winning Trades (1315) 14 15 RECORD, SIMIB,ATED RESULTS DO NOT REPRESENT ilYPOTllliTICAL OR SIMUI.ATED PERFORMANCE RESULTS llAVE CERTAJN lNllERENT IIMITATIONS UNLIKE AN ACTUAL PERFORMANCE FOR Tiffi JMPACT, IF ANY, OF CERTAIN ACTUAL TRADING ALSO, SINCE THE TRADES HAVE NOT ACTTJALLY DEEN EXEClJfED TIIE RESULTS MA. Y HAVE L:NDER- OR OVER-COMPENSATED THBY ARE DESIGNED WITH TI-IE BENEFIT OF 11-IAT FACT MARKET FtCTORS, SUCII AS LACK UF LJQUIDJTY. SIMULATED TRADING PROGRMiS IN 0h}1ERAL ARE ALSO SUBJECT TO TIIB SIMILAR TO TI-IOSE SHOWN. SIMULATED

RESULTS DO NOT LOSSES OR PROFITS AClilEVE TO LIKELY IS OR WILL ACCOUNT ANY TIIAT MADE BEING IS REPRESENTATION NO IIINDSJGILT TIIEREFORE CAREFID.LY CONSIDER WHETHER SUCH NECESSARILY IWLY FUTURE PROFITS. 11lli RISK OF LOSS IN TRADING COMMODITY CONTRACTS CAN BE SUBSTANTIAL YOU SHOULD TR.ADINO IS SUITABLE FOR YOU lN tJom· OF YOUR FINANCIAL CONDITION RESULTS NOT ADJUSTED FOR COM:MISS!ONS AND SLIPPAGE A Decision Table Showing a history of the October/February Live Cattle spread [& Buy Oct 95 Uve Cattle(Cl/J:)/Sel/ Feb 96 Uve Cattle(ClJE) Moo,o Research Center, Inc. Enter on approximately 06/22 • Exit on approximately 08/07 YEAR . u) 0) ENTRY PRICE ENTRY DATE CONT EXIT DATE EXIT PRICE PROFIT PROFIT AMOUNT BEST EQUITY DATE BEST EQUITY AMOUNT WORST EQUITY DATE WORST EQUffY AMOUNT 1994 06/22/94 -2.42 08/05/94 3.05 5.47 2188.00 08/05/94 2188.00 06/24/94 -4.00 1993 06/22/93 -0.38 08/06/93 0.10 0.48 192.00 08/06/93 192.00 07/23/93 -760.00 1992

06/22/92 1.77 08/07/92 2.98 1.21 484.00 08/07/92 484.00 06/25/92 -248.00 1991 06/24/91 -0.98 -1.88 -0.90 -360.00 07/08/91 680.00 08/01/91 -396.00 1.55 1.33 532.00 07/25/90 620.00 07/02/90 -56.00 2.40 2.05 820.00 07/26/89 1100.00 1990 06/22/90 0.22 08/07/91 08/011190 1989 06/22/89 0.35 08/07/89 1988 06/22/88 -6.45 08/05/88 -2.52 3.93 1572.00 08/05/88 1572.00 06/23/88 -172.00 1987 06/22/87 -2.50 08/07/87 -1.07 1.43 572.00 08/07/87 572.00 07/23/87 -320.00 1986 06/23/86 -0.02 08/07/86 2.93 2.95 1180.00 08/07/86 1180.00 07/14/86 -24.00 1985 06/24/85 -2.48 08/07/85 -2.43 0.05 20.00 07/25/85 32.00 07/23/85 -476.00 1984 06/22/84 -2.22 08/07/84 -1.33 0.89 356.00 07/09/84 496.00 07/24/84 -64.00 1983 06/22/83 -1.58 08/05/83 -1.35 0.23 92.00 06123/83 312.00 07121/83 -208.00 1982 06/22/82 -0.67 08/06/82 1.48 2.15 86000 08/06/82 860.00 07/28/82 -180.00 1981 06/22/81 -1.45 08/07/81

-1.07 0.38 152.00 08/03/81 388.00 07/06/81 .22000 1980 06/23/80 -2.00 08/07/80 -0.87 1.13 452.00 07/29/80 712.00 07/21/80 -100.00 Percentage Correct 93 ~verage Profit on Winning Trades !Average Loss on Trades Protective Stop 1.96 676.57 -0.90 -360.00 Losers 1.52 607.47 Total Trades Average Net Profit Per Trade (790) Winnen 14 I 15 HYPOTIIETJCAL OR SIMULATED PERl-URMANCE. RESlilTS HAVE CERTAIN INHERENT Lll,UTATJONS UNLIKE AN ACTUAL PERFORMANCE RECORD SlMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE TIIE TRADES HAVE NOT ACTUALLY BEl!N EXECUTED nm RESULTS MAY HAVE UNDER~ OR QVERCOMPRNSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF UQUIDITY. SIMULATED TRADINO PROGRAMS IN GENERAL ARE ALSO SUBJECT TO TIIE FACT TIIAT TIIEY ARE DESIGNED WlnJ BENEFIT OF IIINDS(GJIT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WllL OR IS UKELY TO ACIUliVli PROFll:s OR lOSSES SIMILAR TO THOSE SHOWN SIMULATED RESULTS 00 NOT NECESSARILY

JMPL Y FllflfRE PROFITS. TI-Di RISK OF LOSS IN TRADING COMMODITY CONTRACTS CAN BE SUBSTANTIAL YOU SHOULD TIIBREFORE CAREFULLY CONSIDER WHETiiER SUCH TRADING IS SUITABLE FOR YOU IN LIGIIT OF YOUR FINANCJAI. CONDITION RESULTS NOT AOnJSTEDFoR COMM:ISSIONS AND SLIPPAGE nm A Decision Table Showing a history of the May Soybean/Wheat spread I[A Moo,, Moo,, Research Ccntc:r, Inc. I Buy 5ll llay 95 Soybeam(CBOT)1Sell 5.ll Jlay 95 Wheat(CBOT) • Enter on approximately 02/12 - Exit on approximately 04/23 BEST ENTRY DATE CONT YEAR .---r ·, u) ENlllY PRICE EXff DATE EXIT PRICE PROFIT PROFIT AMOUNT EQlITTY DATE BEST EQUITY AMOUNT WORST EQUrfY DATE WORST EQUITY AMOUNT 1994 02/14/94 325.00 04/22/94 344 19.00 950.00 03/23/94 1762.50 04/07/94 -737.50 1993 02/12/93 231.50 04/23/93 240.25 8.75 437.50 03/10/93 1237.50 04/16/93 -237.50 1992 02/12/92 159.50 04/23/92 200.75 41.25 2062.50 04/15/92 2750.00 02/14/92 -325.00 1991 02/12/91 321.00

04/23/91 312 -9.00 -450.00 03/08/91 250.00 03/25/9) -1787.50 1990 02/12/90 209.00 04/23/90 235.5 26.50 1325.00 03/09/90 1875.00 02/26/90 -37.50 1989 02/13/89 309.00 04/21/89 345.5 36.50 1825.00 03/22/89 2837.50 04/03/89 -375.00 1988 02/12/88 302.75 04/22/88 348.5 45.75 2287.50 04/04/88 3287.50 02/16/88 -450.00 1987 02/12/87 222.50 04/23/87 237.5 15.00 750.00 04/23/87 750.00 03/02/87 -1162.50 1986 02/12/86 242.00 04/23/86 243.25 1.25 62.50 02/19/86 525.00 04/04/89 -1475.00 1985 02/12/85 241.25 04/23/85 247.5 6.25 312.50 03/19/85 1050.00 04/15/85 -500.00 1984 02/13/84 384.75 04/23/84 418.25 33.50 1675.00 03/20/84 3650.00 02/14/84 -25.00 1983 02/14/83 254.50 04/22/83 41.75 2087.50 04/22/83 2087.50 02/16/83 -112.50 1982 02/12/82 04/23/82 22.75 1137.50 04/08/82 1525.00 03/03/82 -587.50 1981 02/12/81 263.50 305.50 296.25 286,25 114/23/81 344.25 38.75 1937.50 04/09/81 2987.50

03/02/81 -712.50 1980 02/12/80 222.75 04/23/80 203 -l9.75 -987.50 02/13/80 412.50 04/09/80 -2437.50 ~ercentage Correet ~verage Profit on Winning Trades ~ verage Loss on Trades ~verage Net Profit Per Trade 87 Protective Stop 25.92 1296.15 Winners -14.38 -718.75 Losers 20.55 1027.50 Total Trades (1336) 13 2 15 HYPOTHETICAL OR SIMUl.ATED PERFORMANCE RE SULTS HA VE CERTAIN fNHERENT LIMITATIONS UNLJKE AN ACnJAI PERFORMANCE RECORD, SIMULATED RESIJL T3 00 NOT REPRESENT ACTUAL TRADING, ALSO, SINCE l1IE TRADES HAVE NOT ACTUALLY BEEN EXECUTED THli RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR 111B IMPACT, IF ANY, OF CERTAIN MARKET FACTORS. SUCH AS LACK OF LIQUIDITY SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO nm FACT TiiAT nmv ARE DESIGNED WJTii THE BENEFIT OF lnNDSIGHT. NO REPRESENTATION IS BEING MADE ~ T ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMU,AR TO THOSE SHOWN SIMULATED RESULTS DO NOT NECESSARILY IMPLY FU11JRE PROFITS.

TIIE RISK OF LOSS IN TRADING COMMODITY CONTRACTS CAN BE SUBSTANTIAL YOU SHOULD TIIEREFORE CAR:EFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGIIT OF YOUR FINANCIAi. CONDITION RESULTS NOT ADRJSTED FOR COMMISSIONS AND SLIPPA<lE A Decision Table Showing a history of the August Soymcal/Soybean Oil spread [I Moore , . M~" . Research Centci, Inc. I Buy Aug 95 Soybean Mea/(CBOT)/Se/l Aug 95 Soybean Oi/(CBOT) Enter on approximately 06/08 - Exit on approximately 06/ 15 CONT ENTRY ENTRY EXIT FXlT PROFIT BES! J-:QUrIY BEST EQUITY YEAR DATE PRICE WORST EQUITY IJAII•: lIUCI WORST EQUITY AM()[INT llATI iMOIINI lliTE AMOIJNT 1994 06/08/94 2812 06/15/94 3946 I !34.0ll 06/15194 1993 06/08/93 6172 06/J 5/93 6314 !42.00 06/15/93 142 00 1992 06/08/92 5350 Ob/15192 5558 208.00 06/] 5/92 208 00 06110/92 -]38.00 1991 06/10/91 5312 06/14/91 5716 4U4.0il 06/14/91 404 00 06/11/91 -56.00 l990 06/08/90 2708 OG/16/90

3172 464.UO 06/13/90 484.00 1989 06/08/89 7210 Oo/J 5/89 7870 660.00 06/15/89 660.00 1988 06/08/88 11844 06/15/88 12918 1074 uo 06/10/88 1094.00 1987 06/08/87 6886 06/15/87 8738 1852 00 06/15/87 1852.00 1986 06/09/86 4488 06/13/86 4792 30•100 06/J 3/86 304 00 1985 06/l0/85 -5364 06/14/85 -5052 l 12 00 06/14/85 312 00 06/11/85 3,1,100 1984 06/08/84 -1392 06/15/84 -128 1064 on 0(,/15/84 11164 00 06/13/84 -36 00 1983 06/08/83 6050 06115/83 5874 -176 on 06/13/83 -I 78 IHl . (.,) 0) I 134 00 1982 06/08/82 6570 06/15/82 6768 198 00 06/11/82 102 00 1981 06/08/81 7360 06/15/81 7386 26m 06/Ja/81 ISO 00 1980 06/09/80 4246 06/13/80 4288 42 00 06/11/80 Percentage Co1Tcct 9) Average Profit on Winning Trades Average Loss on Trades !Average Net Profit Per Trade 56314 56ll4 -176.00 -176 0ii 513.87 5llS7 HYPOTI-IETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATJONS 70 00

06/12/80 -2.110 Protective Stop (668) Winners 1"1 I.oscrs I Total Trades I5 UNLIKE AN ACTUAL PERFORMA.NCE RECORD, Sl1flTTATED kESI 1-TS DO NOT REPRFSFITT ACTUAL TRADING, ALSO, SINCE TI-IE TR.Al)ES HAVE !<ClT AC:TlJALLY BEHi EXECLTED THE RESULTS MAY llAE lJNOI:]; OR OVER,OJ11PENSATED FOR !HE !MPACT, IF ANY, OF CERfAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY SJt,.1ULATED TRADING PROGRA1S !}; GEIBRAL ARE ALSO SUBJECT TO THE FACT 11IAT THEY ARE DESlGNEn WITH 1lffi BENEFIT nF HINDSIO!IT. NO REPRESENTATION IS BEING f,WJ!:, THXr ANY ,\:CCUNT WILL OR IS LIKELY TO AClllEVb lIWFITS UR LOSSES S!MlLAk TU TI-IUSE SHOWN SIMULATED RESUL rs DO NOT NECEsSAR.ll Y IMPLY FUTURE PROFITS THE RISK OF LOSS IN TRADING CO;-{MODITY COTRACTS CAI BE SlffiSTANTIAI YOU SHOULD TI-fEREFORE CARFTUJL Y C<lNSrDER V1lETI-fER SIJG/ TRADING IS SUITABLE FOR YOU TNLIGKrOF YOUR FINANCIAL CONl)ITJON. RESULTS NOT ADJUSTED FUk CUMM!SSIONS AND SLJPPAUE A Decision Table Showing a history of the July

Soybean Oil!Soymeal spread A Buy Jul 95 Soybean Oil(CBOT)/Se/1 Jul 95 Soybean Meal(CBOT) Moo,o Research Center, Inc. Enter on approximately 06/ ! 7 - Exit on approximately 06/29 BES! CONT IT!AR •(.,) . (0 I I ENTRY DATE ENTRY PRICE EXIT DATE PROFIT EXlT PRICE AMOUNT 1994 06/17/94 -3722 06/29/94 -3406 1993 06/17/93 -6314 06/29193 1992 06/17/92 -5700 06129192 1991 06/17/91 -5566 1990 06/18/90 1989 06/19/89 EQUITY DATE BEST EQlTTTY AMOUNT 776.00 -6264 50.00 06/18/93 178.00 06/23193 -5804 -!04.00 06/19/92 124.00 06/26/92 -138.00 06/28191 -4942 624.0U 06128/91 624.00 06/19191 -276.00 -2862 06/29/90 -31411 -278.0U 06/19/90 198 00 06/27/90 -446.00 -9892 Oti/29/~9 -9138 754.0U 06/22/89 830.00 06/17/88 -13504 06/29/88 -9850 3654.110 0(,/29/88 3654 001 06/17/87 -8532 Oo/29/87 734,1 I 188.00 OG/22/87 1286.00 06/25186 20,1.00 1986 06/17/86 -4866 Oc/27186 -4788 7800 1985 06/17/8S 6262 0(,128/85

6134 -128.00 1984 06/18/84 1472 06/29184 2502 1030.00 06/26184 1983 06/17/83 -6024 06129/83 -5782 242 00 OG/29/83 1982 06/17/82 -6860 06/29/82 -6826 1400 1981 06/17/81 -7222 06/29181 -6586 1980 06/17/80 -4044 0(,/27/80 -)860 verage Loss on Trades !Average Net Profit Per Trade I 06/21/94 1988 !Average Profit on Winning Trades DATE WORST EQlJlTY AMOUNT 316.00 1987 !Percentage Correct WORST lQUlTY 116/21/88 -168.00 I -800.00 06/18/86 -42110 06/20/85 -824 00 1198 00 06/20/84 -122.00 242.00 06/24/83 -130 00 06128/82 120.00 06/2 ]/82 -196 00 636.00 06/25/81 878.00 184 00 06/23/80 80 188 00 Proteclivc Stop 732 50 732.50 -170 00 -170 00 552 00 552.00 \inners Losers Total Tra<lcs 06/19/80 I -86 00 (718) 12 3 15 HYPOTHETICAL OR SIMULATED PERFORMANCE RE SUL TS HA VE CERT ArN INHERENT LUdlT AT[ONS UNLIKE AN ACTIJAL PERFORfiANCE RECORD, SI!-villLA TED RESULTS DO NOT REPRESENT ACTTJAL TRADING. ALSO, SJNCE THE TRADES

HAVE NUT ACTUALLY BEi:,~ EXECUTED TIIE RESULTS MAY HAVE UHDER- Ul< OVER·COtvlPLNSAfELl FOR ll!E IMPACT, IF ANY, OF CERTAIN MARKET 1-·AcTORS, SUCH AS LACK OF LIQUIDITY sn. nnATED TRADING PR()(iRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT IBAT TIIEY ARE DESIGNED WITH TI-fE BENEFIT OF HINDSIGHT. NO REPRESENTATION JS BEING MAO!:! THAT ANY ACOJUN"l WILL OR JS LlKELi" ·10 ACf!IEVE PlHJHTS OR LOSSJ,S Siv!ILAR TO THUSE SHOVN SIMULATED Ri::SUlJS W NOT NECESSARILY IMPLY FUTURE PROFITS. THE RISK OF lOSS TN TRAOI~G COM1IODITY CONTRACTS CAN BE: SUBSTANTIAL YOU SHOULD THEREFORE CAREFlTI LY C0NSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN UGI-IT 0F YOUR FINANCIAL CUNDJT!ON RESULTS NO"! ADJUSTCD FOR C:OlvllvllSSIONS AND SLIPP AUE You will note that beneath each Decision Table there is section showing statistical information that helps you to get a better overall picture of the history shown above, year by year. You see the following: 1. The Percentage of years in which the

spread worked in accordance with the Optimized Entry and Exit dates Appendix C 2. The Average Profit on those trades which were Winning Trades 3 The Average Loss on those trades that did not work within the optimized dates. Resources 4. The Average Net Profit Per Trade, ie, the average net profit from all trades both winners and losers. Seasonal and Spread Services 5. A suggested Protective Stop The stop is an optimized amount based on the fifteen year history shown in the Decision Table 6. The Total Number of Winners in fifteen years 7. The Total number of Losers in fifteen years 8 The Total number of trades in fifteen years Commodity Futures Spreads, A Biweekly Futures Spread Letter, by Bob McGovern. If you enjoy monitoring or even trading the spreads offered by a multi-year, oldtimey veteran commodity trader, then Bob McGovern is your man You can learn a ton from his biweekly letter. Bob uses good old-fashioned logic and reasoning in selecting his spread trades He is a wealth

of information on the economy, politics, and markets [Bob McGovern, 30882 Colonial Place, Laguna Niguel, CA 92677. Phone 714-363-6667 Fax: 714-3 63-6672 E-Mail: rbmassoc@aolcom] Moore Research Center Report, A Monthly Seasonal and Spread Report, compiled bv the staff at Moore Research Center, Inc. A thorough and comprehensive report Ji;ting upcoming computer generated seasonal and seasonal spread trades, along with a recap of trades still current and ongoing. Trades have up to 15 year reliability This report features commentanes by members of the staff as well as illwninating articles by some of the top names in futures trading The report contains charts, optimized entry and exit dates, and strategies. This report is the Cadillac of seasonal trading information. [Moore Research Center, 321 West 13th Ave, Eugene, OR 97401. Phone: 503-484-7256 or 800-927-7259 Fax: 503-484-2202 e-mail: swm@mrci.com MRCI World Wide Webb Home Page: http://wwwmrcicom] The $upertraders Almanac by Frank A

Taucher. A yearly Almanac and reference manual listing computer generated seasonal and seasonal spread trades and 320 321 computer generated exotic seasonal and seasonal spread trades. Trades have seven year reliability. The Almanac contains a plethora of philosophy, techniques, and astrological data pertaining to the futures markets [Market Movements, Inc 5212 East 69th Place, Tulsa, OK 74136. Phone: 918 493-2897] Trading Order Power Strategies Four, one-hour audio cassettes and manual. Rules, entry orders and exit orders. Orders for options and spreads Important considerations and strategy development. The Seasonal Trader Report - Futures Price and Seasonal Factor Data Book, A quarterly report listing trades having a seven to ten year reliability. [Seasonal Trader Report 889 Ridge Lake Blvd., Suite 350, Memphis, TN 38120 Phone: 901-766-4510 or 800-526-4612] Trading Optures and Futions Combining options and futures into a powerful, trading strategy. Using Optures and Futions

to offset weaknesses of trading only options or only futures. Create a "income pump" and increase profits Seasonal and Spread Books Traders Notebook The monthly educational teaching letter - covering: Futures, Economy, Other Investments and Implications on you. Chart Reading, Technicals, Questions/Answers, Considerations. Techni-Seasonal Commodity Trading. by Everet H Beckner, Windsor Books, PO Box 280, Brightwaters, NY, 11718. The Handbook of Commodity Spreads, by Wayne Esserman, P.O Box 201, Delphi, IN 46923. Materials - Products and Services from Ross Trading Inc. Introduction to Futures Seminar One day seminar - the basics and the foundation. Markets, exchanges, basic chart reading, how money is made. Papertrading. Resources and your educational path to trading success Trading by the Book Position trading primarily from daily charts and focus on 4 major entry techniques: Trading Ranges, l-2-3s, Ross Hooks, Ledges. Basic use of oscillators and moving averages

Introduction to Options Seminar One day seminar - the basics and the foundation. Nomenclature and terms explained. Basic option strategies Resources and your educational path to trading success. Trading by the Minute Intraday trading in various time frames. Major, Minor and Intermediate entry signals. Trading organization-and issues. 911 -Get Help Seminar Two day seminar - focus on the mechanics and execution. Markets, environments, pits and a fundamentals review. Chart reading. Trading is a Business The trading business, organization and management. Trading psychology and temperment. Trading entrys, exits and warnings Tricks, techniques and analysis. Defensive Trading Seminar Two day seminar - focus on hedging, spreads, seasonal trades and seasonal spreads. Primary defensive techniques to manage the trade Strategic trading and the evolution of the trade. Trading the Ross Hook Ross Hooks - the basics, variations and tricks. Trade filters, rules, and studies - Volatility Stop,

Stochastics, Envelopes, Bollinger Bands, MA Bands and other filters. 322 Trade the Truth Seminar Three day seminar - Bar-Anatomy. Interrelated Determinants in Trading The trading business, organization and management. Extensive chart reading and practical tricks and techniques. 323 . Trading Optures and Futions Seminar Tirree day seminar - market analysis and anatomy. Basic and Advanced Optures - Basic and Advanced Futions. Chart reading and the applications ofOptures and Fution strategies. Referral and Customer Services We keep an extensive database of resources and references which we are happy to share including: Hardware, Software, Brokerage, Research materials, Reference Materials, Books by other Authors and Systems Analysis. From our own research and contributions by others. 324