Spread investing - Advanced concepts Part 3 by Frank Taucher
In the previous installment of this series, I discussed the two tools I use in my seasonal spread
investment program to locate trades that are profitable, reliable and consistent. The objective of the
program is to develop a diversified portfolio of many energized spread trades that can be used throughout
the year for investment purposes.
Now we will discuss some more advanced concepts. We will review money management concepts, the
purpose and use of trading filters, "legging" techniques and stop payment. Again, it will help if we use, as
an example, an actual spread shown in Figure 1. This spread is comprised of long December oats/short
December Chicago Board of Trade wheat (OZ/WZ). For the quarter-month analysis see Figure 2. The
entry date is October 31 with an exit date of November 30. The trade has been analyzed over the past
thirteen years, and has been 77% reliable. The worst loss and the worst drawndown of the trade have each
been $1,450. The average drawdown is $367. The trade has made an average profit of $667 each year,
and as of this writing, the current margin is $500. Inspection of each year's trading history, as described in
part two of this article, suggests a stop of $700.