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Delfin · 10-03-2013, 13:15

Quote:

Originally Posted by ImaginaryNumber

Those interested in Delphin's previous posts on this method of trading can find them starting at the URL below, and later throughout that thread:

http://www.cruisersforum.com/forums/...tml#post653828

I'd like to add my vote of appreciation to Delfin for bringing spread trading and the analysis of MRCI to my attention.

My pleasure.
For the benefit of my son for whom I have been parallel trading I started a step by step guide on how to actually place trades using the Interactive Brokers platform. As with a lot of things you learn how to do, the doing is easier than explaining the doing. The IB platform is so flexible and comprehensive that it's pretty hard to understand it in totality. However, to do spread trading there are only a few functions I use, so if you wanted to start to play with this concept using play money for awhile, these are the functions you would need to learn. I'm sure there are many more functions not shown that would be useful that I don't understand or know about, but these are the ones I use. Their help function will get you started with learning how to do these activities.

1. Creating a Portfolio Page. This lets you record and enter the trades.

2. Creating a Group Header Row. This lets you label a spread so three weeks after you enter the trade, you know what you're looking at with a glance. I record the MRCI spread number, the exit date, the average profit for the last 15 years and the stop loss. For example, "3868, 06/15, $786, <$853>".

3. The symbols for commodities and months. MRCI doesn't provide much help for this since their information seems hopelessly out of date, so as you learn what the symbols are, create a list for future reference. The months are easy and unchanging - F=Jan, G=Feb, H=Mar, J=April, K=May, M=June, N=July, Q=August, U=Sept, V=Oct, X=Nov and Z=Dec. The commodity symbols depend on the exchange. For example, Wheat on the CBOT is "W". On the electronic CBOT (ECBOT), the symbol is ZW. The IB platform can help you figure out what is what and since there are only about 25 or so different commodities you'll figure it out. If you get lost, just call the help desk at IB.

This next is important. Different exchanges offer the same commodity with different symbols. You only want to trade the electronic ones with the maximum volume. When in doubt, always choose these exchanges: ECBOT, GLOBEX, and NYMEX. To enter some trades (cotton, o.j.) you'll also use the NYBOT, but when you have an option, only select the first three. Do not, repeat, do not use any 'open outcry' exchange. These are the pit traders wearing the funny coats and you never know what will happen, so stay away.

4. How to enter an order to buy or sell.

5. How to enter a Combination order. This is a simple way to enter buy, and later sell the spread. You can enter each leg of a spread (long this, short that) and execute both legs, but it is easiest to just create a Combination order using the "Smart Spread" tab and specify the legs and months of the spread.

6. How to subscribe to Market Data. These are the data feeds that give you real time pricing for the legs of the spreads. Don't bother subscribing to the NYBOT feed, as it is ridiculously expensive and rarely used. You basically get all you need for free when you open an account with IB and enter some number of trades per month. I don't subscribe to any of the premium services.

7. How to enter an order with a Condition. This is critical for the cruiser because it lets you specify that a set of actions, like buying or selling a spread will happen at a particular time on a particular date. I use this when I'm going to be out of range of the Internet for a period of time, as well as to set up all trading activities for the next week, all to be auto executed throughout the week. For example, this week there are two spreads to enter and none to exit. One enters on Tuesday, the other on Wednesday. I set up the purchase of these spreads as MARKET orders for 10 a.m. on those dates. I always use Market orders because if you use a limit order for a spread, one leg will execute, but the other won't until the limit spread value is reached. Which it may not. So on auto execute orders you can be 500 miles from shore and end up long one month without the short leg ever executing - not what you wanted. So, only use market orders. I use 10 a.m. because that is a period of maximum liquidity.

I think that's it. A bit to learn, but once learned it only takes me about 45 minutes per account I trade on Sunday to set up a week's worth of activity that is profitable whether the markets are going up, or going down. But because it is a bit to learn about something pretty arcane, most people don't bother.

Delfin · 10-03-2013, 13:30

Quote:

Originally Posted by Maren

There is an edge to the methodology you're purposing (returns are higher than the market) and a requirement the methodology be strictly followed.

Here is my concern: There is something philosophically wrong with the idea anyone can do this. The part of the discipline is relatively easy if the system is mechanically traded. Drawdowns can be managed by only using funds you can loose and having having faith in the system/ability to psychologically withstand drawdowns. But the part that can't be addressed is the edge. Think of it this way, what if 95% of the people were to do this, would they all be in the top say 10% of traders?

Obviously, no. The reason this makes money is because there is an edge. Once the edge goes away, so too do the returns.

Maren, I've been noodling the same question, but I am quite sure it is purely hypothetical so whatever the answer it isn't likely to affect returns. I base that on the fact that for a long time I, and probably no more than a few hundred others, have been trading this way and producing results that are much better than whatever option B is. I have explained it to a great many people, not because I need any affirmation on what I am doing but because I can't see any particular reason for other people not to make money. I just don't see how that hurts me, but even though I can point to the consistent returns very, very few people ever follow through and do it themselves. For some, it is because someone tells them to invest in diamonds, or Swiss Francs, or storage units, and these are much easier to understand than spread trading. For others, it's probably just inertia. Beats me, but I'm not too worried about spread trading returns being distorted because too many people are engaged. And I'm not sure, butI don't think that increasing volume can do anything to the pricing relationship between the spread legs. If everyone were short, or everyone were long, then market returns would be distorted. But in this case, everyone would be BOTH short AND long, so I have trouble thinking through how distortion can occur since the movement between the legs is not based on speculation, but on tangible events in the real world, like when crops are harvested etc.

If there is an edge, it is the edge of learning how to place trades on the hideously complex Interactive Brokers platform, or the willingness/ability to stick to the program and ignore the drawdowns in order to achieve the average, which turns out to be very good profitability on a broad range of commodities that in the aggregate represent a fairly low risk investment with much higher than normal volatility. That's not an edge everyone can have because not everyone is psychologically capable of the frame of mind required.

Aargau · 10-03-2013, 14:37

Quote:

Originally Posted by Delfin

So, other than using your first posts on a cruising forum to comment on how splendid the reflection in your mirror looks, do you have something substantive and actionable on the topic of how people interested in sustaining a cruising lifestyle with modest capital can accomplish that objective?

That's a fair criticism.

Some may call this pessimism, some may consider it pragmatism. I think that once one starts cruising, one should assume no sustainable income other than through existing passive investments, unless one is able to transition an existing profitable business onto a floating platform. It's great to have a portfolio, but the shorter your time horizon on tinkering and trading, the worse you'll do.

Not only do I think it's hard to do active trading on a boat, I think it's hard off a boat without access to resources like a Bloomberg terminal that most non-experts simply don't have. All edges in trading are discoverable statistically and algorithmically and can be acted on faster and better by dark hedges than by any individual.

This is where I will get lambasted again for throwing out big words. If one's understanding of investing is governed by looking for trends through simple gaussian stochastic correlation, realize that there are people who model Markov sinks, quasi-random Monte Carlos, know why Chebyshev polynomials are bad, and how graph Laplacians can be solved in near linear time.

What happens then is that you assume a bigger burden of risk than they do. You may make money, but it's like being a turkey on a farm on October and saying based on past performance I foresee a long life through Thanksgiving, Christmas and beyond.

If you can trade on a longer term window than anyone whose bonus is based on quarterly numbers, that may be an edge you can exploit. I'd gauge 3-5 years a a minimum time horizon. Google Charlie Munger's thoughts his decision tree on infrequent, long term trades. However, that is hard to do in commodities unless (as I mentioned in a prior post) you can take physical delivery of the commodity.

Delfin · 10-03-2013, 15:48

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