Corn/Oats Spread Exit
The blog initiated a hypothetical long position in the March corn/oat spread at -2 cents (premium oats) on October 8th and added another at +45 1/2 cents (premium corn) on November 13th. Originally, these were the December spreads and then they were rolled to the March contracts on November 26th.
The March corn/oat spread made a two-day close below the rising 30-day Moving Average for the first time since early October and signaled a bearish trend change. This triggered the exit signal for the entire position at today’s close of +96 1/4 cents (premium corn). The trade resulted in hypothetical profits of $4,912.50 on the initial position and $2,537.50 on the ‘add-on’ position, yielding a total profit of $7,450 on the trade (not including commissions).
The initial risk on the trade was approximately $1,337.50. In November the exit parameters were raised in order to eliminate the initial risk and lock in a trailing profit on the initial position. This gave us room to add another spread with an initial risk of approximately $1,375. So even though the position size was doubled, the biggest risk ever allowed for on the entire trade was $1,375. This was a function of trailing stop levels and only increasing the position size when the current position had a healthy open profit. Therefore, the hypothetical profit of $7,450 with a maximum risk of $1,375 produced a return of a little better than 5:1 on the trade.
What Good Trading Is All About
In our opinion, this corn/oat spread is a great example of what we consider to be a successful spread trade campaign:
First, a high-probability situation was identified (corn was trading at a discount to oats).
Second, a long position was entered only after a bullish trend change was signaled (via a close above the declining 30-day Moving Average for the first time in several months).
Next, the position size was increased only when the initial trade risk was eliminated and a new setup with a minimum reward-to-risk expectation of 3:1 was identified.
Finally, the entire position was liquidated without hesitation once a bearish trend change was signaled (via a close below the declining 30-day Moving Average for the first time in several months).
There is never any guarantee that a trade will work, of course. It’s all speculation and risk. But we have found that applying these rules consistently to each and every trade provides a positive edge over the long-term.