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Lesson 10: Not only the Seasonality – Part 1

Commodity Spread Trading, not only the Seasonality

Commodity Spread Trading, not only the SeasonalityThe simple seasonal windows that we have seen in the statistical databases article, is a necessary but not sufficient condition for opening a position. They do not give us the timing. So, It will be important getting a confirmation from the technical analysis.

Technical signals are definitely more precise than entry and exit dates proposed by the statistical database. We will need to correct those dates, calculated only on a historical basis, adapting them to market conditions we face at that moment.

I begin with the ABC of technical analysis, and I define the trend. There are three possible situations in which a market can find at any given time. It can go up (uptrend), it can come down (downtrend) or it can move sideways (congestion).

Bullish Trend, Uptrend

The trend, therefore, represents the direction in which moves the price. It is said that a market is in an uptrend when we have higher highs and higher lows (above).

Similarly, we have a downtrend when we have lower highs and lower lows (below).

Bearish Trend, downtrend

Lateral movement is unlikely in spread trading because although the futures that make up the spread will move horizontally, the spread will be equally in trend in most of the time.

An important aspect is that in spread trading we will never see charts with price bars or candlesticks, but more simply, the spread is drawn with a line joining all the daily closing prices.

Adapting, so the two definitions we have just seen, in spread trading we no longer talk about higher and lower highs or lows, but rather, about higher or lower closes.

Let's see, most likely, what it is the most used patterns in spread trading: 1-2-3 high or low by Joe Ross.

The 1-2-3 high is formed at the end of an up-trending market. Typically, prices will make a final high (point 1), proceed downward to point 2 where an upward correction begins; then proceed upward to a point where they resume a downward movement, thereby creating the pivot (point 3) as you can see below. The input in the market after a descent below the point 2 of the pattern.

1-2-3 High, Jow Ross

The 1-2-3 low is formed at the end of a down-trending market. Typically, prices will make a final low (point 1); proceed upward to point 2 where a downward correction begins; then proceed downward to a point where they resume an upward movement, thereby creating the pivot (point 3) like shown below. The input in the market to the overrun of the point 2 of the pattern.

1-2-3 Low, Joe Ross

We can see an example of the 1-2-3 low in the chart of ZSK17-ZMK17 (buy soybean delivery May 2017 and sell soybean meal delivery May 2017) below.

Spread Trading, Soybean Meal, Soybean Oil

When we create a spread, it is customary, but no one is stopping us from doing differently, to subtract from the future we buy, the one we sell. In this way, we will always have to buy a spread and never sell it. Similarly, we will only use a 1-2-3 low by Ross as the signal.

However, the 1-2-3 high of Ross is not entirely useless in spread trading because it can give us an important "advice" in case we had opened a bullish position: to close the trade, being the 1-2-3 high is a bearish pattern (and so in contrast to our position).

Seasonalgo, seasonal trading, spread trading, commodity market

 

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