Introduction
31 October 2021
Eur-Usd target reached! Now what?
17 November 2021
The web is full of traders and pseudo-traders who advertise courses on spread trading telling the usual fairy tale of how easy it is to earn by following the seasonality. Yes, a tale because by now the "seasonality" are not certain even at the climatic level (I live in central Italy, we are in mid-November and for a week there are temperatures well over 20 degrees), let alone with commodities.
Below, you can see the results of Moore Research's recommended spreads (15 each month) in 2020 if you had opened and closed all trades on the optimised dates.
A considerable loss. You may be thinking that this is something exceptional due to the pandemic. Well, look at this other graph with the equity line since 1990.
It is very clear that it is not a matter of one year or the pandemic that since 2015, seasonality alone is no longer making money as it did in the previous 15 years. Of course, this is partly due to an increasing interest in spread trading even by some funds. However, seasonality will be much more likely to be met if all conditions are the same as in previous years. If something changes, goodbye seasonality.
This is why a spread needs to be analysed across the board, evaluating all aspects. None of these is more or less important than the others, they all have the same value.
This is my previous analysis of a spread on cotton "Calendar spread on cotton (and some considerations)" in which I expressed my doubts about a decrease in the spread, which then turned out to be correct as the chart below shows.
This is not because I am a phenomenon or have a crystal ball that reads the future. I simply analysed the spread and everything that surrounded the cotton and commodity markets, without underestimating or overestimating anything but giving each aspect equal weight and importance. I did not limit myself to mere seasonality.
However, there is a point to be made. Not all spreads are equal; there are spreads that are heavier (monetarily) and dangerous and others that are calmer and leave room for correction. The spread on cotton cannot be compared to the spread on coffee, which I analysed in this other article, "An interesting spread on coffee".
The movements and, above all, the values of these movements are different. Consequently, the considerations and decisions are also different. There is no doubt that a spread on coffee is quieter than one on cotton, even in a period like this, and therefore, less risky. A contrary movement is more manageable and creates fewer problems.
In conclusion, there are too many variables and aspects that can affect the performance of a spread, it is unthinkable to limit ourselves only to seasonality. Seasonality is something extra that we have when we trade a spread but we should not give it more value than it has.
Only if all conditions are the same as in previous years will the spread execute a certain movement. Otherwise, that seasonality will most likely lead to a loss.
So, the essence of spread trading is to be able to analyse a spread correctly and completely so that you have, in front of you, the exact situation and know, barring changes in the conditions analysed, the future direction of that spread. This is why I love anomalies when they occur from time to time because my analysis shows them to me and also tells me the reasons for those anomalies so that I know what to do.
And when analysing a spread, you must not overestimate seasonality even though it is often portrayed as the Holy Grail, but to evaluate all aspects well, all having equal importance. Make all the considerations and if even one of them does not convince you, better to use wisdom and let that spread go.
A seasonality, in order to be respected, needs all past conditions to be respected also in the current year. But if you do not analyse these conditions, how can you follow a seasonality?
There are a lot of variables and aspects that can affect the performance of a spread, it is unthinkable to limit ourselves to seasonality alone. Seasonality is something extra that we have when we trade a
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.
3 Comments
Dear Mr Carli. I ordered your book ‘Spread Trading’ from Amazon because you mentioned the relevance of expiration dates like ‘first notice’, ‘first delivery’. Most of the advisors react simply to certain patterns on a chart and I never ever found an advisor who gave attention to expiration dates. I assumed that it might be one of these ‘common secrets’: everybody know, nobody mentions. I’m looking forward to your book!
Best regards from Zurich, Switzerland.
Hi Heinrich,
thank you for ordering my book. No, no secrets, just experience. Futures between First Notice Day and Last Trading Day usually have particular movements.
Have a good evening!
David
Great books David, I thoroughly enjoyed reading them.