Articles

10 season spread 1 Every modern person is familiar with the concept of seasonality, for example, we are all accustomed to the rise in prices of fresh vegetables in the winter or the rise in price of fuel in severe frosts, but few know that on such patterns one can earn by trading spreads.

Spread here is not the difference between the ASK and BID prices, which many forex traders are used to, but the difference between the prices of two (or more) commodities or securities. For example, if a bushel of corn costs $ 4, and wheat $ 3, the spread between them will be $ 1.

From the point of view of technical and fundamental analysis, spread-trade is no different from ordinary speculation, i.e. on these synthetic indicators, trends, impulses and kickbacks are formed, which can be used to extract profit, but the most interesting in this case is the seasonality, since it makes itself felt even at such moments when the underlying assets strongly correlate.

A BIT OF THEORY

As we noted above, seasonal trends are familiar to every person, moreover, if the price increase provoked by devaluation and high inflation always causes anxiety and indignation, then the periodic increase in price tags in stores for certain products is perceived by the consumer absolutely normal.

10 season spread 2 For example, in virtually all countries of the northern hemisphere, the demand for refreshments is increasing in summer, and their retail prices are also rising slightly. If we look at global macroeconomic trends instead of retail, we can give another example: in December grain traditionally becomes more expensive, as the next harvest will not be collected in the near future, and spring sales of balances will begin closer to April / May, when the prospects of the new season will become clear.

In the financial market (if more precisely - commodity), a similar principle works, i. quotes of some derivatives depend on a number of factors that manifest themselves almost every year and stimulate key players to sell / buy the asset. Such trends are called seasonal.

Now about spreads. There is a logical question - why not trade in conventional contracts (CFDs or futures), because they are subject to seasonal trends in the first place? The fact is that due to the influence of specific factors on inter-commodity spreads, there are sometimes such tendencies that are imperceptible on the underlying assets.

For example, in the current market realities, corn and wheat synchronously increase in price, while this trend can not be described as a long-term pattern. At the same time, the spread between these goods increases seasonally, i.e. corn grows in price faster than wheat.

A similar seasonal trend on the spread could have formed under other initial conditions, namely:

  • Corn went up, the wheat became cheaper;
  • Wheat became cheaper faster than corn.

Thus, when trading the spread, we eliminate the influence of unpredictable events (a speculative factor) and work out only the most reliable patterns that reflect the dynamics of supply / demand for goods in the real sector of the economy.

MARKET OF CEREALS AND OILSEEDS

Since we have already mentioned corn with wheat, we will begin our survey with them, in particular, in order to obtain the appropriate trends in the MetaTrader4 terminal, we can use the indicator Ind_Seasonal_Trade, which automatically brings some quotes to a comparable kind. It can not be said that this algorithm is very popular, but you can easily find it in the MQL5 database.

10 season spread 3

As for the actual calculations, it is allowed to use conventional glued CFDs as the base. Of course, this technique is inferior in accuracy to the analysis of futures contracts, but, from the statistical point of view, this error is insignificant.

So, in the graph above was the dynamics of the average seasonal trends on the spread "corn-wheat" for the last 3, 5 and 15 years, respectively. As you can see, the first obvious trend is formed from December to mid-May, i.e. it lasts winter and spring.

Within the framework of the indicated trend, corn is in great demand than wheat, so in the first days of December it is advisable to buy maize contracts and simultaneously sell an equivalent volume of wheat CFD. Of course, there is no year for a year, so sometimes the signal considered will be a loss, but statistics show that the probability of working out this pattern is about 87% (13 out of 15 cases).

The law just considered is very easy to explain. Firstly, in winter the demand for corn is increased by livestock complexes, since this cereal is one of the most nutritious feedstuffs. Wheat does not receive such powerful support, as it is used mainly in the food industry, the demand for products of which keeps at a stable level almost all the year round.

Secondly, closer to spring, farmers and consumers of corn closely monitor the weather conditions in the US / Europe and, with the slightest hint of late planting, begin to hedge the risks by purchasing the relevant fixed-term contracts. With wheat such an acute problem is not observed, since it gives two crops - winter and spring.

The latter reason is indirectly related to the previous one. The fact is that in April and May (when the potential of a new crop can be estimated as a spring field in the fields), farmers and wholesalers start to get rid of old wheat stocks. These actions put pressure on prices.

And the second trend on this spread is the diametrical opposite of the cycle just considered. In particular, long-term observations show that from June to mid-August demand for wheat exceeds the market demand for corn.

As you can see, the sale of corn and the simultaneous purchase of wheat at the specified time interval brought profit in 13 cases out of 15, therefore this regularity can be considered quite reliable .

As for the reasons for the formation of this trend, then here again the explanation should be sought in the real sector. Recall, CFD quotes are tied to futures traded on CBOT, and the prices of the latter, in turn, depend on the moods of large producers and processors of raw materials in the US and Canada.

In June, the above subjects begin to closely monitor the situation in the fields, i.e. study the publications of the US Department of Agriculture on the state of crops, look at the forecasts of the meteorological service, and monitor the research of independent organizations engaged in collecting and processing statistics, etc. In other words, they react painfully to any negative news.

In this regard, the prospects of corn are almost not a concern, yet maize is one of the most unpretentious cereals, which is important to sow in time, but with wheat the situation is quite different. The fact is that at the stage of active vegetation the grain is afraid of any deviations from the climatic norm, i.e. it equally badly tolerates downpours, heat and frosts. And what summer does it cost without local anomalies? Hence the imbalance in supply and demand.

And another spread, related to the agricultural market, involves studying the differences between the prices of soybeans, corn and wheat. As practice shows, in the period from October 12 to May 29, it is advisable to buy oilseeds and sell grain (the volumes in each knee of such a transaction should be equivalent).

If we move away from the stock market a little, this transaction will look like this - we buy a bushel of beans and at the same time we sell corn and wheat to the bushel. Of course, the actual volume of the speculative operation will be much larger, since even a minimum lot for CFD involves working with several dozen bushels.

When the bull cycle on the spreader comes to an end, it makes sense to "roll over", since from June 1 to October 11 soybeans start to become cheaper in relation to corn and wheat. The fact is that in the designated time interval, a fresh harvest of soybean is harvested to the market, assembled in Brazil, which puts pressure on quotes.

Statistics show that over the past 15 years, the sale of the "bean-corn-wheat" spread has brought profit in 12 cases, i.e. The probability of working out this movement tends to 80%. In addition, within this trend, one bearish sub-cycle is formed, which continues from September 7 to 11.10 - it can be used to "top up".

So, as we could just see, inter-commodity spreads provide good opportunities for earning CFD-contracts, in fact, we have additional tools that are missing in the terminal and broker specifications.

SPREAD-TRADE IN SUGAR, COFFEE AND COCOA

In addition to cereals, so-called "soft goods" are very popular on the exchanges, so some dealing centers began to add coffee, sugar (USA) and cocoa to the specification, whose prices, in turn, also depend on weather factors and the vegetative cycle.

It should be noted that analyzing the listed instruments is slightly more complicated than the grain market, since their quotes are more susceptible to various force majeures, for example, a strong drought in Brazil can lead to a decrease in coffee yields for the next 2-3 years, resulting in the usual seasonal trends will malfunction.

Nevertheless, statistics are stubborn, in particular, it shows that over the past 15 years, a rather strong upward trend has been forming on the spread of "cocoa-coffee" from April 22 to May 31, which can be used to generate profit.

10 season spread 4

Since 2002, this signal was worked out in 11 cases out of 15 - is it a lot or a little? Compared to cereal patterns, the calculated probability seems "unprepossessing," but with regard to financial markets in general, the chances seem to be not so and bad.

By the way, earlier we did not focus on the dimension of contracts, as the prices of soybeans, wheat and corn are quoted as "cents per bushel", but when working with the "cocoa-coffee" spread, several important specific nuances must be considered:

  • The price of cocoa is measured on a scale of "dollars per ton";
  • The price of coffee is measured in cents per pound (0.4535 kg.).

On the chart above, this discrepancy has already been recalculated, but when making a deal it is necessary to make the spread knees equal. For example, if you work with CFD, the cocoa lot is equivalent to 100 kg. product, then the volume of the "coffee" operation should also be equal to 100 kg. (220 pounds). Since the specifications in different DCs are very different, recalculation is best performed at the price of a tick (this is the easiest way to do it).

As for signals to sell the spread of "cocoa-coffee", in this regard, quality entry points are difficult to find. Apparently, the deficit of cocoa beans played its role, which last decade did not allow quotations to decrease significantly.

The only interesting "bearish" interval is observed from June 1 to September 1, but even in this case it is advisable to open short positions on the spread only after the formation of strong UP pulses, i.e. on the return of the indicator to the average price. In our opinion, it is better for beginners to refrain from such trade.

And another important commodity spread is sometimes called "coffee with sugar", as it reflects the discrepancies between coffee and sugar quotes. For the sake of fairness, we note that such an analysis does not seem quite logical, yet the products listed differ greatly in many parameters, but in spite of this, a strong seasonal up-trend is formed on this synthetic instrument from the first days of February to May 8-9.

In particular, the probability of working out the signal considered (simultaneous purchase of coffee and sale of sugar) is about 73%, which is quite good. And since it came about the specifics of the goods, we recommend that you pay attention to the following important nuances:

  • Quotes of sugar are highly dependent on the dynamics of the Brazilian real, as Brazil is the largest producer of sugar cane (ie strong strengthening of the BRL can completely eliminate the seasonal factors that put pressure on the prices of the "sweet" product);
  • The deficit of arabica is partially compensated by robusta supplies, as a result of which the abnormal outbursts on the coffee market are also rapidly dying out;
  • In recent years, sugar is increasingly used in the production of biofuels, so in the future, the demand for it can grow significantly.

Thus, if it is still possible to open seasonal transactions in the grain market without additional filters, then when working with soft goods it is better to insure yourself with technical tools, for example, you can screen out false entry points in the direction of the moving average.

OIL SPREAD

And the last tool, which can not be forgotten, reflects discrepancies in the moods in the US and European oil products markets. Incidentally, if access to CFD for agricultural products can still cause problems, then there is no difficulty with oil, since both brands are represented in almost all dealing centers.

From the point of view of seasonal analysis, it is reasonable to keep the long position from the spread of "WTI-Brent" from April 25 to June 24, as preparation for the "car season" begins at the designated interval in the USA. This term is understood as an increase in the activity of both private motorists and commercial carriers.

All the rest of the time the spread is mainly located in the "outset", therefore it is not possible to recognize the seasonal impulses on it (that is, the probability of their development leaves much to be desired). By the way, trade from the corridor borders of spread traders is also very popular, but this topic is beyond the scope of today's review.

CONCLUSIONS AND ADDITIONAL RECOMMENDATIONS

Today we have once again made sure that the movements in the financial markets are not at all random, on the contrary, the quotes of many assets depend on the fundamental factors that manifest themselves almost every year. If we summarize, for seasonal analysis, we can note the following advantages:

  • In its essence, it is elementary, i.e. it is enough to compare the dynamics of several instruments and average the results over the N-th number of years;
  • Seasonal entry points are known in advance, i. E. a trader does not have to explore the market every day;
  • The likelihood of working out the pattern is also known long before the opening of the position, so the speculator can calmly and weighedly assess his capabilities.

On the other hand, our own observations and responses from Western traders show that, some time after the start of seasonal trade, beginners begin to lose enthusiasm and are disappointed in this method, since it has certain drawbacks:

  • First, force majors sometimes violate long-term patterns;
  • Secondly, not all speculators have the patience to wait for the development of the trend, which can last up to six months;
  • Thirdly, sometimes brokers close the CFD trade without warning, as a result of which the whole strategy collapses;
  • And the last obvious minus - the spread often reaches the seasonal peak / bottom before the specified time (for example, according to statistics, the trend ends on May 5, and the maximum of floating profit was fixed on April 15).

In fact, the listed problems only seem serious, but experienced speculators have long learned to deal with them, in particular, to increase the effectiveness we recommend stop-loss, activate the swap-free service (which will allow you to hold the position for a long time), and also use Take-profits equal to the average profit. In addition, you can split the position into parts and fix the result as the price moves in the direction of the forecast.