Although I spend most of my day managing client accounts, I also dedicate time to speaking with people who are interested in trading futures, yet have never traded before or are hesitant for one reason or another to dive into the markets. Throughout these conversations, I have noted that one of the biggest obstacles keeping potential and former traders from diving into the markets is a lack of understanding on market fundamentals. Understandably, people do not want to invest their hard-earned money into a trade that they do not completely understand how their investment works. In addition, I’ve also noticed that many people are uncomfortable trading in volatile markets. It can be difficult for newer traders to stomach the large swings of some commodity markets, especially if they are used to small intraday moves and have a broader view of the market.
For those that can identify with the characteristics above, one of the best ways to avoid all of that is to study and diligently investigate seasonal spread trades. Seasonal spread trades add transparency and reduce volatility to any trade, and they’re an important tool that any successful trader has in his commodities tool-belt.
Futures spreads tend to reduce volatility in the market, because rather than taking a single, outright futures contract, a position is initiated on each side of the market in different contract months. Thus, in a spread trade, the investor attempts to set up a net position wherein the value, actually called the spread, depends on the difference between the price of the commodity bought and the commodity the investor intends to sell. Undoubtedly, this is a general description of a trading technique that is not always easy to master. As such, I strongly encourage you to review “The Basics of Futures Spread Trading”, written by Craig Turner, Senior Market Strategist at Daniels Trading.
What makes seasonal futures spreads different is that they are executed during specific times of the year based on fundamental patterns that tend to reoccur during that time of the year. The fundamental patterns are typically based off of straight-forward economics that the majority of people can understand.
One resource that Daniels Trading often uses to gather seasonal spread data is MRCI (Moore Research Company, Inc). MRCI is a subscription based website that specializes in seasonal futures trading and offers detailed explanations for every trade that they recommend. Included in MRCI’s trade analysis is a seasonal window for entering and exiting a trade, past performance of the trade, a historical chart of the spread and a fundamental story for why they are recommending the trade.
Below you will find an example from MRCI of the type of fundamental analysis behind a seasonal futures spread:
MRCI says, “Winter wheat is planted September/October. Throughout winter the new crop needs snowcover for protect ion. This vulnerability has helped new-crop wheat to retain its value at least and to more typically rally into the January and the dead of winter.
Because soymeal normally accounts for 55-65% of soybean product value and its consumption is greatest during winter, processors crush at capacity during harvest and through winter. As they do, supplies of soyoil grow almost as if it was a byproduct. Thus, prices of oil have tended to suffer into December and even into January. Nonetheless, prices have usually begun to make a bottom or even to rise toward a seasonal peak in spring when processors will sharply reduce crush and supply pressures ease on soyoil. (Note how closely prices have so far conformed to their seasonal pattern.)”
Ultimately, seasonal futures spreads are a great form of trading for those looking for trades with simple fundamental analysis and the potential for reduced volatility. Spreads also typically offer reduced margins, which can be great for smaller account sizes. To learn more about the benefits of trading seasonal futures spreads I encourage you to watch the webinar, Seasonal Futures Spread Trading at the ICE, presented by Craig Turner.
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This material is conveyed as a solicitation for entering into a derivatives transaction.
This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.
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