Making a Living while Cruising

[Delfin]

Occasionally in the past I have referenced commodity spread trading based on historical trends identified through Moore Research. Without completely recovering old ground, spread trading is, in my opinion, a very low risk investment strategy because if done right, it covers multiple commodity categories, which results in a lower overall risk beta for the portfolio when compared to equities, bonds, or whatever. Attached are the hypothetical 2011 results of following a single 1 x 1 spread for every suggested trade provided by Moore Research, which would require around $50,000 to handle maximum margin requirements.

MR provides an entry and exit date, a stop loss amount and of course, the long and short legs of the commodity. I can verify these results, and have found them consistently obtainable for many years, sometimes slightly better, sometimes slightly worse. For 2011, the maximum draw down of equity was $10,000 and peak profit was $74,000 with an annual return for the 200 or so trades totaling $69,000. This would be reduced by around $1,000 in commissions if an electronic trading platform like Interactive Brokers were used.

I don't have any interest in Moore, and only offer this to fellow retiring boaters who may still wish to generate investment income. Buyer beware.

Images include:

1. The total returns by commodity category. Within each category there would be multiple spreads involved, for example long April hogs while simultaneously short June live cattle.

2. The total returns for 2011 by month.

3. A snippet of the current spread trades currently active, showing the legs, the entry point, the exit point, and the current equity in the trade.

4. The hypothetical returns for the last 30 days, showing winning trades and the loss amount of these that reached the stop loss point.

[Zonker]

Very interesting but also a very dangerous "proposal". In the world of trading there are just no free meals. I am trading full time for 7 years and I have to say - if you are not willing to get very deep into trading please don't waste any of your hard earned money. Latest numbers say that 89% of retail and private traders/investors are losing long term.

If you are willing and have the >>endurance<< you might get to a point to make a living from trading. And just for your information - that would be more likely day trading (no overnight holding risk).

[Delfin]

I would agree that virtually all traders lose money because virtually all traders do not have the discipline to stick with a diversified strategy that minimizes risk, or the humility to recognize that they cannot be smarter than the market. Losing traders place bets on single stocks, or single industries or single commodities. That is not what I was referencing or suggesting, but to each his own. I only know what has worked for me consistently for years, and day trading certainly isn't the program because day trading is the riskiest kind of trading I can think of, which just for your information, is why most traders get their heads handed to them.

Most of the spreads I trade range in duration from a couple of weeks to a few months. All follow historically consistent patterns which work most of the time. Some win, some lose, but since the spreads cover all available categories of commodities, risk is reduced about as low as it gets and on balance the returns are consistent.

But as I said, to each his own.

[boden36]

The last time Delfin mentioned this, I took his advice and researched what he suggested.
As a result, I began to trade spreads and have found what he says has so far (10 months trading) been proven true, and I am grateful that Delfin was kind enough to share the information.
One rider to this is that you need to feel comfortable with the possibility of loss. I trade with funds that I can afford to lose.

Regards,
Richard.

[ozskipper]

No offence but stressing over pork belly prices is the last thing I would wont to be doing while in the middle of the pacific.

[Zonker]

Don't wanna be rude ... but the fact is 89% are losing long term. If delfin and bloden36 have been successful until now - sigh - then 18 people trading have been losing until now (simply said).

[Delfin]

That's a reasonable possibility if what we are doing is what the others are doing. What others typically do is what I believe you suggested was necessary, deep immersion in trading, where you are sitting over the computer watching trends and convincing yourself that you can snatch a few crumbs off the table before you get crushed. 9 times out of 10 you get crushed. Which is why I don't trade that way, although I salute you if you do and are successful.

But that is not what is suggested, nor what I would recommend even to strangers. What is suggested is that if unleaded gas goes up slightly faster or down slightly slower than crude oil for delivery in June fifteen plus years in a row, it might do the same thing a 16th year in a row. Perhaps the reasonableness of that proposition is why the method described results in year in and year out profitability, or has for many years for me and everyone I know who follows the same method, especially when the strategy is spread out over multiple categories of commodities in order to reduce risk. Perhaps the attached will help illustrate the point. This is an example of one spread out of 21 that are currently active. It is Hogs over Live Cattle for July delivery. The background reality that drives this spread is the fact that the cost feeding hogs going into July is greater (hogs are grain fed) than live cattle (grass and grain fed) because grain costs more than grass. Not a terribly radical concept, but the net effect is that the price of hogs goes up faster or down slower for this delivery month most of the time. If you look at the attached, you'll see this is the case for 14 out of 15 years with the entry and exit points recommended. What you can't see from this data is that this trade was profitable 14 out of 15 years whether the price of hogs and cattle were going up or down. They have currently been going down, by the way, which has not affected the profitability so far because Hogs, as predicted, have gone down slower than Live Cattle.

Incidentally, this trade closed in my account yesterday with an unrealized profit of $1400.00, which is about the margin requirement to enter the spread contract in the first place. This trade could have been put on automatically on Jan 5, taken off automatically on Mar 29 and without my having to turn on a computer in the interim,which is why it is an interesting way to trade for cruisers.

But as I said, to each his own.

[ImaginaryNumber]

This method of trading certainly looks interesting, though there may be a few mistakes , both typos and analysis, in the data charts.



This chart shows FIBER as having 0 Wins, 4 Loses, for a total of 3 Trades ?!?



For the year 2005 this chart shows an Entry Date of 1/5/05, an Exit Date of 3/29/05, but a Worst Equity Date of 11/21/04?!? These two errors are probably just typos.

A little more serious error in the second chart is their showing that they have only one loss. The year 1998 is clearly a loss, but with a recommended Protective Stop of ($1388), the year 1997 should also have been a loss because it had a maximum loss of -$1400, which would have triggered their stop-loss.

Also, it is not clear to me why they show a total loss for the 15-years covered of -$2080 (which is the loss for the year 1998) when their loss for that year should only have been what their Protective Stop of $-1388 was set for (assuming no slippage, etc)?

[Delfin]

Originally Posted by ImaginaryNumber

This method of trading certainly looks interesting, though there may be a few mistakes , both typos and analysis, in the data charts.



This chart shows FIBER as having 0 Wins, 4 Loses, for a total of 3 Trades ?!?



For the year 2005 this chart shows an Entry Date of 1/5/05, an Exit Date of 3/29/05, but a Worst Equity Date of 11/21/04?!? These two errors are probably just typos.

A little more serious error in the second chart is their showing that they have only one loss. The year 1998 is clearly a loss, but with a recommended Protective Stop of ($1388), the year 1997 should also have been a loss because it had a maximum loss of -$1400, which would have triggered their stop-loss.

Also, it is not clear to me why they show a total loss for the 15-years covered of -$2080 (which is the loss for the year 1998) when their loss for that year should only have been what their Protective Stop of $-1388 was set for (assuming no slippage, etc)?

Yep, you found a couple of typos in the summary data. These guys aren't Goldman Sachs, just a couple of people doing a sizable amount of data collection and modeling in the Oregon woods.

Regarding the more "serious error", the stop losses in their model are triggered at end of day, not as they occur. I don't know of a platform that will execute a stop loss on a spread automatically, so this would be a case where the trade went into free fall and at end of day exceeded the stop loss amount.

[ImaginaryNumber]

Delfin,
I’m pleasantly surprised to have you respond to this thread, since it’s been inactive for 6 months

Oz Skipper said:

No offence but stressing over pork belly prices is the last thing I would wont to be doing while in the middle of the pacific.

And you said:

I don't know of a platform that will execute a stop loss on a spread automatically, so this would be a case where the trade went into free fall and at end of day exceeded the stop loss amount.

If no trading platform will exit a spread trade automatically, is spread trading really a good fit for the cruising life? It seems that if the odd trade goes badly south, and you are blithely making passage to the Tuamotos, you could be in for a world of financial hurt when you finally get an Internet connection.

I went to the MRCI web site but couldn’t find a public update for their 2012 Seasonal Spread Review. Do you by any chance know how well their projections did last year?

Assuming you are still spread trading, do you take all the spread trades that MRCI suggests, or do you apply some sort of analysis to filter trades?

[Delfin]

I spoke with Moore a few years ago and asked about spread stops. They don't use them on straight trades (short/long whatever) and wondered why they recommended a stop on spreads. I also wanted to know if they had modeled a no stop rate of return. They said they had, and there was no difference, but for spread traders who are more averse to volatility, a stop loss gives a sense of comfort, even if no measurable practical benefit. So one response is to say it doesn't matter and if you are mid ocean, no drama from volatility swings anyway. My preference is to ask my son to log onto the account daily, and exit trades if need be. Total time investment daily is about 1 minute. Might not work for everyone, but it does for me.

2012 results aren't posted yet. It was an interesting year because of the drought that affected grain spreads, which really hammered the account. However, there have been equal movement on the win side as well, so I'll be curious to see what they report.

I think you also asked whether I trade all trades, and the answer is no. I exclude currencies because as the world's financial system melts down, historic relationships are no longer as strong as they once were. In the past I have tried to apply filtering on trades, and I advise against it. The beauty of this system is that it relies on objective data only. When you insert your own judgment, you just introduced a variable that will work sometimes and sometimes not. After 10 years, I can tell you it isn't worth the effort.

Regarding my prompt response, this forum sends you an update if you subscribe to a thread, so no mystery.

[ImaginaryNumber]

Delfin,

You have me intrigued, and I'm hoping I can bother you with some more questions.

Have you excluded currencies from consideration because you could see from the information which you get from Moore that historical patterns are not holding, or are you excluding currencies because your own understanding of world currencies makes you concerned about trading them?

Knowing what you know now, if there was another drought this summer would you not trade the grain markets?

I ask these two questions because sometimes you seem to say that you just trust Moore's research and trade what they say to trade, and other times you seem to be paying attention to fundamentals, as well as to what Moore suggests.

When entering a spread trade, do you buy calls and buy puts, or do you buy calls and sell calls?

Do you enter/exit with a market order, or at some pre-determined price? If with a market order, how much slippage do you expect? If at a pre-determined price, how is the price determined?

Is there ever a problem with being able to enter/exit one leg of the trade, but not the other leg? When trying to exit a trade is there ever a problem with the markets being locked at limit-up or limit-down against you -- or do both legs move together so that you just ride the limits out with no harm?

Thank you.

[Delfin]

Originally Posted by ImaginaryNumber

Delfin,

You have me intrigued, and I'm hoping I can bother you with some more questions.

Have you excluded currencies from consideration because you could see from the information which you get from Moore that historical patterns are not holding, or are you excluding currencies because your own understanding of world currencies makes you concerned about trading them? I exclude currencies because Moore's approach is to use historic patterns to establish relationships that have a probability of repeating themselves in the future. Those historic patterns have changed in the last few years as the U.S. has crossed over the line of bankruptcy and nations are now seeking an alternative reserve currency. It may turn out that 2012 will show profitability for the currencies group, but I've felt fine standing on the sidelines.

Knowing what you know now, if there was another drought this summer would you not trade the grain markets? Yes, because droughts will affect both legs of a grain spread. This year happened to be particularly bad because of when the drought hit and what grain was in storage. IMHO, it becomes too complicated to weight these factors, so I just follow the historic pattern, relying on the fact that every year, on balance, the spreads develop profitability.

I ask these two questions because sometimes you seem to say that you just trust Moore's research and trade what they say to trade, and other times you seem to be paying attention to fundamentals, as well as to what Moore suggests. No, I apologize if I have given that impression. With the exception of currencies, I do not think that I can outsmart the market, and I doubt I can with currencies either. What makes currencies less rational is that their relative value is a function of central bank decisions. All other groups, with the exception of precious metals have prices pretty much dictated by the market.

When entering a spread trade, do you buy calls and buy puts, or do you buy calls and sell calls? I don't trade futures options, which is what you are describing. I only trade spreads - long one contract and short another.

Do you enter/exit with a market order, or at some pre-determined price? If with a market order, how much slippage do you expect? If at a pre-determined price, how is the price determined?Always market orders, never limit. With spread limit orders, you can have one leg fill and wait awhile for the other leg to fill, which is drama I avoid.

Is there ever a problem with being able to enter/exit one leg of the trade, but not the other leg? When trying to exit a trade is there ever a problem with the markets being locked at limit-up or limit-down against you -- or do both legs move together so that you just ride the limits out with no harm?Rarely, but yes it can happen with thinly traded commodities like fiber. For this reason, I don't follow Moore's pattern of placing an order on market close. I place all orders at 10:00 a.m. PST at the market for both legs. There is sufficient volume then that I have never waited more than a second for a fill. Sometimes I probably give up a little relative to their theoretical results, sometimes probably gain some by executing at a set time, but this avoids what happened to me once - just what you describe. One leg filled, the other leg didn't until the next morning. It didn't hurt, but it could have.

Thank you.

You're quite welcome. My answers are in red.

One question you didn't ask but is relevant is how you enter or exit trades when away from an Internet connection. The platform I use is Interactive Brokers, and it allows creating a 'condition' for an order, one parameter of which is time. So, I can set up a few weeks of entries and exits in advance (very, very carefully to avoid stupid mistakes) and the trades are executed on autopilot.

[lostsheep]

Wow. I studied Ken Roberts commodities trading for a while. I tried trading sugar futures, and lost my butt. Roberts was based here in So. Oregon, but he's nowhere to be seen anymore. US Charts still has an office here, I think.
I'm currently looking at penny stocks. Just started studying them.

[Delfin]

Originally Posted by lostsheep

Wow. I studied Ken Roberts commodities trading for a while. I tried trading sugar futures, and lost my butt. Roberts was based here in So. Oregon, but he's nowhere to be seen anymore. US Charts still has an office here, I think.
I'm currently looking at penny stocks. Just started studying them.

Yes, trading straight legs of commodities is not for the feint hearted. As they say, if you want to make a small fortune trading straight commodities, best to start out with a big one.

Spread trading across all groups consistently while following historic patterns is a different kettle of fish. Still volatile, but consistently profitable over time.