In This Issue

Trading Strategy Analysis: Natural Gas Spread

10 Key Questions on Measuring Your Trading Progress & Success

Economic Reports and Expiration Notices

June 24th, 2009 - Issue #486

Trading Strategy Analysis: Natural Gas Spread

The following is a Natural Gas seasonal spread from Moore Research complete with 15-year track record and an in-depth commentary on its pros and cons.

According to MRCI's data, this spread has made money in each of the last 15 years with a max. drawdown of $1,730 or less in any given year.

They suggest exiting the position if it incurs drawdown of $1,843 at the close of the old regular pit session (11:30 P.M. Pacific Time) on any given day.

Compared to its historical entry prices, the spread is currently trading at about $1.59 - $1.60.

According to the MF Global Margin Dept, initial margin is $1,620, maintenance margin is $1,200.

What happens to a trending market when seasonal influences arrive in support? We get a chance to find out with the two strategies for this week.

Spread Commentary

Consider natural gas, for which there are two seasonal bulges in consumption. The primary is, of course, the heating season which begins November 1 and runs through March. The secondary is the cooling season, when large hot-weather regions depend on gas to generate electricity to run air conditioners. Distributors in those hot-weather regions accumulate stocks during the so-called shoulder months of April and May, when it is neither hot nor cold. Thus, prices tend to rise from March into May for gas deliverable during the heat of summer.

But as hot weather arrives in June, stocks have already been accumulated and distributors sell into the market. In fact, they aggressively liquidate those stocks into July, thereby pressuring cash prices lower. In contrast, cold-weather distributors take advantage of typically lower prices to accumulate stocks for winter. Thus, bear spreads have tended to enjoy not only aggressive selling of summer-delivery gas but also aggressive buying of winter-delivery. For example, the Long December/Short August Natural Gas spread has closed more favorably toward December on about July 22 than on about June 21 (the solstice) in each and every one of the last 16 years - in only 3 of which would any daily closing drawdown have exceeded $0.053/mmBtu, greater than $0.081 in only one. (Each $0.001/mmBtu is worth $10/contract. According to the NYMEX web site, the exchange requires minimum margin of $675. Brokers accept nominal spread orders, but they are more readily executed in increments of $0.005.)

This spread normally suffers a severe decline from early March into mid April, perhaps as hot-weather distributors aggressively accumulate summer stocks. But this year, perhaps as the market continued to liquidate and large speculators played the contango via bear spreads, the daily chart has taken on the appearance of a rounding bottom with the uptrend beginning to accelerate. For example, after the spread made its low for May near $1.400, it made a new high, pulled back on the first day of June to make what is so far its monthly low at 1.566, rose to a new high at 1.869, and pulled back this week to retest and so far hold its earlier June low when it bounced off 1.603 (a retracement from the June high back toward the prominent May low of a little less than 60%).

Thus, the uptrend remains intact --- at least as long as the May low is not violated, certainly if the early June low holds, and especially if the low this past week at 1.603 holds. Will the seasonal of nearly impeccable credentials serve to reinforce it? Not to suggest it will do so this year, but the 2007 spread exceeded 2.200 and the 2006 spread exceeded 3.500.

Spread Table

Click the image to enlarge

For more information

MRCI Homepage

Table and additional data

Free Trial

Or, a 2-week trial to Jerry's Weekly Spread Commentary here: http://www.mrci.com/catalog/wsctrial.php.

Disclaimer: Seasonal tendencies are a composite of some of the more consistent commodities futures seasonals that have occurred over the past 15 years. There are usually underlying fundamental circumstances that occur annually that tend to cause the futures markets to react in a similar directional manner during a certain calendar period of the year. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past or will in the future achieve profits utilizing these strategies. No representation is being made that that price patterns will recur in the future. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. Results not adjusted for commission and slippage.

10 Key Questions on Measuring Your Trading Progress & Success

At some point in nearly everyone's trading timelines, they wonder how their trading successes (or failures) compare with those of other traders. Wondering just how well you stack up to other traders in the industry is a natural curiosity and a human psychological tendency. However, actually knowing the success or failure rates of others doesn't do a lot to move you farther down the road of where you want to be regarding trading success.

Most traders also wonder about the success rates of the "professional" traders—the ones who make their living solely by the profits they generate from trading. I will provide you with an answer to this question at the end of this feature.

Below are 10 questions regarding measuring your own trading progress and success. These questions should help you determine where you stand in this challenging field of endeavor.

1. What is trading "success?"
This is a most basic question. Most would agree that ultimate trading success is defined as being profitable at trading—making more money than you lose. There are other secondary factors that also define success in trading, such as finding a "balance" between trading and other life activities. But it's being profitable at trading that is the benchmark of defining success.

2. What is trading "progress?"
Beginning traders should not expect to have immediate and ultimate success trading futures, stocks or FOREX markets. What they can expect in the early going is to make steady progress through gaining knowledge and experience. Even veteran successful traders continue to make trading progress. Achieving and maintaining trading success requires continual progress—namely continuing to seek out trading and market knowledge. Traders who truly enjoy the "progress" and process of trading do have a significant trading edge over those who do not enjoy learning and gaining experience.

3. At what point in my trading timeline should I expect trading "success?"
Trading success (winning trades) can come right away—even for the beginning traders. What is less likely for the inexperienced traders is sustained trading success. Beginners can even run into a "hot streak" that skews the overall reality of trading. Immediate (and likely fleeting) success for a beginning futures trader can do longer-term psychological harm—if he or she does not fully recognize and understand the hard work and perseverance required on the road to trading success. Many times I get questions from less-experienced traders that go something like this: "I've been trading two years and I've only been able to about break even." My reply to them is, "Hey, you should not be too discouraged with those results. Many traders don't have that kind of success in the early going."

4. How long will it take to go from being a less-experienced trader to an experienced and hopefully successful trader?
Determining a precise timeline at which trading success will arrive will vary greatly among traders. Some beginning traders will spend nearly full time coming up to speed. Others may spend an hour or two a week on the subject. There is no right answer on how much time to spend studying trading and markets. I have many readers who are taking up trading in retirement. I have a few that have taken up trading over the age of 80 years. One is never too young or too old to learn about markets and trading. A general rule would be for a beginning trader not to expect sustained trading success within a few months. More likely is a timeframe of a few years to achieve sustained trading success. Now you see why money management is so important in futures trading. You have to survive before you can succeed!

5. When should I "throw in the towel" and admit that trading is not for me?
There is no one right answer to this question. If trading is making you miserable and creating other bad habits (kicking the dog), then it's time to quit—or at least take an extended break. If you do not have the financial resources to trade futures, then you should not participate. Futures trading should be conducted only with money a trader can stand to lose, without impacting other more important obligations, such as grocery and rent money. It is important to point out that the beginning futures traders who "flame out" first are usually the ones who did not have the financial resources to trade futures in the first place.

6. Am I still hungry for trading and market knowledge?
One should never stop endeavoring to gain more knowledge about markets and trading. Even the successful veterans who've been in the business for many, many years will say that they are still learning on a daily basis. If you are still striving to learn more about this business--and are enjoying doing it--then that's a positive signal.

7. How many trading losers should I absorb before I change my trading plan of action?
This is a real tough one to answer. Again, there is no single right answer. However, if you believe you have a well-founded and thoroughly researched trading plan of action, don't abandon it just because you are on a losing streak. All traders have winning and losing streaks. That's a part of trading. Traders enjoy the winning streaks and do not enjoy the losing streaks. But during the losing streaks they forge ahead, knowing that their plan of action is still solid. Trading plans can certainly be tweaked, such as trading fewer contracts or trading less frequently during a losing streak. For most traders, a complete overhaul of one's trading plan is probably a last resort that merits much consideration.

8. How can I keep myself motivated on the winding road to trading success?
Traders who enjoy the entire process of trading don't really need a lot of motivational help because they are already fascinated by what they are reading and learning. But during a losing streak or some other "dry spell" in trading—when morale can slip—it is prudent to read some trading books that are based less on specific methodologies and more on trading psychology. Attending trading seminars is a great way for a trader to become reinvigorated. (And it's also a great value to those already invigorated!) You not only will gain fresh trading and market knowledge, but you also will get to see and speak with the seminar lecturers as well as traders who are in the same position as you.

9. How much should I listen to other traders when trying to evaluate my own trading progress or my own trading plan?
It is good to have a trading partner or "buddies" with whom to share your ideas and to discuss markets and trading. The learning curve improves when a trader has another trader or traders with similar experience with whom to share ideas. It is also beneficial to have an experienced mentor to help guide you through the "rough waters" that all traders experience at times. But at some point, most traders do want to be more or less autonomous in their decision-making. As many traders gain more experience, knowledge and confidence, they will use outside influences as "second opinions" to reinforce or provide another angle to their own sound opinions. Many traders also have full-time "day jobs" and need outside sources to help save them time and to keep track of what's going on in all the markets.

10. What is the average success rate of the "professional" trader?
I have not seen any "official" studies of the percentage of winning trades of the average professional trader. However, it is generally agreed upon by many in our industry that the better professional traders have a winning percentage of around 4 out of every10 trades—or a 40% winning percentage. Breaking this down even further, it is estimated that half of the winning trades are only small winners and not much better than break-even. Thus, it can be loosely extrapolated that most of the professional futures traders make most of their money on one or two trades out of every 10. This only underscores the importance of sound money management in futures trading—namely cutting losses short and letting winners run.

Economic Reports and Expiration Notices

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!