Spread Trading Experience (user contribution)

For whatever reason, not everybody can or wants to become a day trader. I was one of them. Due to work from home and small kids around I was looking for alternatives. I found two - stock pair trading and commodity spread trading - and decided to have a go with both of them. I started with spreads.

Looking back at that time (a few years ago), I must say that contrary to my usual character, my preparation was quite thorough. I read and made notes about all commodities that I intended to trade. I created a Notebook in OneNote that contained brief descriptions with all the basic information. At that time I found only one good source with spread and seasonality charting capabilities (and by the way, it was not SeasonAlgo).

Equipped with a freshly opened account, new knowledge about commodities, completed basic training about spread trading and a few paper trades I dived into the thing and opened my first real spread trade.

To cut a long story short, after several spreads (Lean Hogs, Crude and Gasoline, Treasuries) I quitted. The emotional turmoil created by incorrectly chosen spreads and volatile equity curve was too much for me to bear. I did not want to give up, though, so I ventured into another not very widespread trading strategy called stock pair trading. And I have stuck to it ever since.

A couple of years later, after gaining some experience in handling stock pairs as well as my emotions during PnL swings (very modest in pair trading) I started to look for ways to compensate for occasional streak of not very successful trades during periods of earnings.

It was easy to come back to spreads. I searched online again in anticipation of growing popularity of this type of trading since my last attempts. And indeed, I found lots of talking. But no practical help. Then I stumbled upon an easy online charting tool on the SeasonAlgo website. Thanks to their anniversary, I was lucky enough to be able to use the tool for one complimentary month (March/April). On the other hand, it came so quickly that I was not able to prepare as thoroughly as last time. So I just based my new spread trades on my previous knowledge and worked the spreads on the go.

Due to my past experience I planned to avoid spreads with high swings. I cautiously selected three spreads with a potential of just a couple of hundreds USD. One of them was a spread in Crude Oil (CLN14-CLM14). I assessed the risk and its potential and decided to use my old strategy for entry.

The spread was already opened according to the SeasonAlgo strategy so after considering the trade, I bought 1 spread at -0,86 on March 26 after it created a Ross hook and looked promising. However, as it sometimes happens, the spread started to trade up and down and then aggressively against me. I had the spread planned and had my Stop Loss ready, however the feeling of loss is never nice. Because of that I was following the spread a bit more cautiously and I found out that not only on the daily chart but also during the day it traded in a channel. Because my plan allowed it and the spread confirmed it, I scaled in and bought another contract at -0,99 at the beginning of April. On the following day, the spread closed at the low (near my Stop Loss) and went up immediately afterwards reaching the target on the other side of the channel a few days afterwards. Had I followed the spread a bit more before, I would be prepared for the channel. However, I was a bit too impatient with opening it and had to manage the trade on the go.

And here is how it looks today:

Crude Oil Jul/June 2014

To draw a conclusion from the sample trade, I have realized that I need to combine both my approach from the past as well as my newly acquired insights. I have also realized that even though spread trading is far distant from day trading, there are several principles that apply to both.

Here are my main findings:

  1. It can be heard everywhere: Give the spread some room. Well, I absolutely agree. Still, I am not an advocate of the check-it-once-per-day (at the close) and forget-about-the-trade-otherwise approach once you open a position. I would even recommend to follow it (not very closely) a week or so before the planned entry date. The reason is simple. You get a feel for the spread movement, you might be able to spot the channel in which it trades (as I did only later). And you may find out that which leg trades faster and thus will "lead" the move (it is not always the closer one).
  2. Plan
    • A plan for the whole spread trading strategy is a must. Because of my previous failure, I have a plan for what commodity spreads I am going to trade at first and how I am going to "expand" after gaining some experience. I guess, it will prevent me from trading spreads that are far too much for what I am able to emotionally sustain (both for wins and losses).
    • I have a plan for each and every trade. Based on the point no. 1) I know how a spread currently behaves and I can either adjust my previously planned approach (for example which entry signal I am going to use) or confirm it.
  3. Plan goes hand in hand with adherence. Called discipline usually. Already a long time ago I found out that without a plan I have no confidence. If I am fine with my plan, I am confident. But if I do not adhere to my plan, I do not give up. I need to find out which part of the plan is making me break my rules (it is usually the amount of risk).
  4. Write it all down. Spread trading is not excessively time consuming and it may be tempting to skip writing both the plan and notes. One of the reasons for writing a plan is above in point no. 3. In case something goes wrong, the plan is the only way how to find out what it was. As to the notes, only time will show which notes are irrelevant and can be skipped and which provide valuable information.
  5. Stop hoping. There will be other opportunities. Here is a saying that I heard quite often in the past, "Hope dies last. But it still dies." It might sound terrible but hope is an enemy. It steals time (the only asset that cannot be acquired, we have only what we have) and capital (by blocking an amount that could have been used for other opportunities).


There is much more to it. And that is the beauty of trading.