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Anyone who has taken a course will have heard the same three concepts repeated on sites and books dealing with spread trading. That you have to follow seasonality and base your analysis on seasonal patterns (correlation, backtest, the open and close price level of the seasonal window, chart signal, the RSI must be overbought or oversold, divergence... comment below in case I have forgotten something) and ignore everything else.
I am not surprised to hear some of these “trainees” say that spread trading no longer works. Given how it was explained to them, I do not blame them. The fact is that what they have followed by paying a lot of euros, dollars or other currency is not spread trading but only a part, no more than 20%, of what spread trading really is.
Today I show you a trade against seasonality that I opened last week and that goes against everything most of you do.
I am making a clarification. I do not report on the site all the operations that I open, only some to show my way of working and to give some hints (also because writing articles like this one cost me from four to five hours of time). This analysis has only an educational purpose, it serves to show you that in spread trading there is a whole world outside mere seasonality. Following seasonality is not only unproductive, but it also limits you a lot, leading you to miss good trading opportunities.
Now, I come to my trade. It all started with a chart, the soybean meal/soybean oil ratio, which you can see below (with the Continuous histogram chart).
The ratio, partly because of the war and the strong speculation that has affected almost all commodities, was back below 6 and then rose again in the last two weeks. To resolve doubts and not to confuse anyone, if the ratio rises it means that soybean meal is appreciating more than soybean oil. Conversely, if the ratio falls, soybean oil is strengthening against soybean meal.
A ratio, however, cannot be traded. So, I had to construct a spread. Little effort was needed since among all the spreads in my book on the best seasonal spreads is ZMN22-ZLN22. (alternatively you can use ZMV22-ZLV22). The seasonality is bearish and starts between mid-March and mid-April and ends between mid-May and mid-June. Below you can see the chart with the two seasonal patterns at 5 and 15 years.
The seasonality is therefore bearish (although the two seasonal patterns are not so well correlated), my trade bullish. Sacrilege! No, the fact that nobody explains in the courses is that a seasonality will only repeat itself if all the conditions are met, if they are the same as the previous year. If something changes, the seasonality will most likely not repeat this year, in defiance of your divergences, chart patterns and all the considerations you have made.
Let me show you the Seasonality stacked chart.
This year the spread is at a lower price than the previous nine years, and only last year did it subsequently fall below the current price level (which is not surprising since in the ratio chart you can see that last year the value was close to 5).
The last two charts I show you are the Speculators' net position on the two futures. Below you can see the soybean meal along with the Continuous price of the ZMN22 futures contract.
This, on the other hand, is Speculator's net position on soybean oil with the Continuous price chart of the ZLN22 futures contract below.
You can see from the two charts above that the situation is quite different. The soybean meal is still below its 2013-2014 all-time high and still well supported by hedge funds. Soybean oil, on the other hand, has surpassed its all-time high of last June but this has not been matched by an increase in the net position, which started to fall well before the June 2021 peak.
All of this led me to buy ZMN22-ZLN22 last week, going against seasonality. Now I do not know if the trade will end in a gain or a loss, but the odds are on my side and even though this will not always mean a gain, over time it will allow me to make steady gains each month and keep the risk under control.
Moral of the story: seasonality is not the only aspect you need to know.
Seasonality is not the only aspect you need to know and today I show you a trade against seasonality that I opened last week and that goes against everything most of you do
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
1 Comment
Grazie per questo articolo, David. Molto utile.