The Encyclopedia of Commodity and Financial Spreads (Wiley Trading) Review

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The Encyclopedia of Commodity and Financial Spreads (Wiley Trading) ReviewThis book is packed with great spread analysis. The insight, however, is just fair to "middling" (Ha!Ha! - look up middling!). And I found the writing extremely poor, for it was confusing. Thank God (and the writers) for this because it made me dissect the spreads to understand them. I've only scratched the surface, but my confusion has IMHO given me some valuable insights:
Writing comments:
(1) "Specific" contracts are not identified and symbols are not used (the very first spread "Buy Nov crude, Sell Apr crude" means, for example, buy Nov04, sell Apr05). Be sure you are trading what it recommends!
(2) Definitions: Above is a "bull spread" but bull spread is not cleared defined. The same can be said for "Red" Dec Corn. The definition of "Red" is done by inference ("next year's `Red' crop."), BUT a clear and concise definition for "Red" is given on page 358, or 270 pages LATER!
(3) Confusing: On page 88, a paragraph starts "Long old-crop July/short new-crop December is a classic bullish corn spread.". This spread is NOT really discussed in the book. Rather, you are to trade the opposite - a bearish spread ("Buy Dec/Sell Jul"). Since "bull and bear spreads" were never well defined and the book "talks in inverse", I was utterly lost on page 88 of the book.
Then I started "dissecting" and here are a few warnings:
(4) Beware the exit date, it can be the last day of trading.
(5) Beware low volume, which the book only sometimes discusses. I've been trying to get into a feeder cattle spread for several days but can't (the book mentions its methodology is to test the surrounding dates to ensure they work OK too. I'm setting the spread by "normal widths/ranges" rather than by specific dates, and thin volume is preventing my trade from happening).
Now for "the money"... real insights:
(6) Look at the tables and THINK about them.
(7) Re-read #6 above... again... and again... and again. That good ole 1st spread (#1 above), "Buy Nov crude, sell Apr crude", is both deceptive and revealing. In 1990, I was in Kuwait when Iraq invaded, so perhaps this is why I noticed, but this spread generates $17120 in profits (20yrs x $856 avg). 1990 is responsible for almost half those earnings, a whopping $7940. The non-invasion years are still not bad, but it's a "totally different spread", if you will.
Here's some REAL MONEY:
(8) Backwardation: When the nearby contract sells for more than the far contract (generally due to tight supplies). Note: while there is "a Keynesian debate" over what is normal, most accept that the far contract should be priced higher. In any spread, you're trying to buy the cheap and sell the expensive. I have not yet seen the book discuss backwardation (I'm jumping around by trade date), but if it did I'm sure the book would say "If a market is in backwardation, you get to buy the expensive while it is cheap and sell the cheap while it's expensive"! Confused (LOL)? In the book's "Buy Dec soybean oil/Sell Aug" table (p158), which is 100% correct (all trades were profitable), I noticed that the most profitable spreads where those where the entry price started out as a negative (i.e. backwardation). Total profit of 20 spreads is $4854, but the seven "negative" (backward) spreads generated $3822. In other words, trading this spread ONLY when the spread starts in backwardation generates a per trade profit of $546 vs. the other 13 averaging $79 per trade. Huh! Wow! I have noticed more examples where backwardation is a big factor in generating profits (corollary: Spread all backward markets?).
The truth be told, I love this book, but not for the writing and only somewhat for the trade ideas. The seasonal insight is worth its weight in gold (still LOL!). But the greatest value I received from the book came, counter intuitively, because it is so poorly written. It made me think - and work - and in doing so I have gained invaluable insight (I'm NOT giving you ALL my insights, aka "trade" secrets).
Remember, trading futures is not easy and few people actually make money doing so. This book should help you - but it's not a system to be traded blindly. With all due respect to Eric, if trading futures was this easy, it would have been arbitraged away by now (and this is not a pun, this is serious business). Rather, it's a starting point, a reference. I believe this book will help my trading (I'm still analyzing) and I believe it can help yours.
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