Planning the Work
On July 20th the blog implemented a scale trade strategy with the December 2017 copper(x2)/gold spread. The scale ran on $5k intervals where a spread would be purchased every $5k down and then liquidated every $5k higher.
Keep in mind that the price intervals for the scale were based on closing prices. This led to several better-than-expected purchase and liquidation prices since the closing price would often overshoot the exact $5k interval.
Furthermore, we launched the scale with several ‘bonus fills’ as the spread was well below our theoretical start level of -$5k where the value of the sum of two 25,000 lb. copper contracts is worth $5,000 less than the value of one 100 oz. gold contract. We initially bought four December 2017 copper(x2)/gold spreads at -$21,135, yet we set the liquidations targets at -$15k, -$10k, -$5k, and even money.
Working the Plan
As the spread continued to drop, we picked up a couple more positions. They were purchased at -$25,725 on August 1st and -$30,915 on September 6th.
The spread has been in a downtrend since the spring of 2015, so the drop to new record lows certainly was a test of a scale traders mettle (metal?) and conviction!
Finally, a bounce came.
The spread that was purchased on September 6th was sold on September 15th for a profit of +$6,800.
The spread that was purchased on August 1st was sold on October 4th for a profit of +$7,030.
Then we experienced nothing but radio silence for the next month. The spread was bound in a tight range as it refused to drop low enough to trigger a repurchase or rally high enough to trip the wire on another exit.
Ringing the Cash Register
The silence was finally broken one week ago and the move has been explosive! On November 7th the December 2017 copper(x2)/gold spread closed at -$13,090 and triggered a liquidation order. This resulted in a profit of +$8,045.
On November 8th the December 2017 copper(x2)/gold spread closed at -$8,970 and triggered another liquidation order. This resulted in a profit of +$12,165.
A third liquidation order for the week was triggered on November 9th the December 2017 copper(x2)/gold spread closed at -$4,985. This resulted in a profit of +$16,150.
Finally, the last remaining position in our scale was liquidated on November 10th when the spread closed at +$375 and gave us a nice profit of +$21,510.
The total profit on this scale was +$71,700.
In just under four months.
Not too shabby!
All positions in the scale have been liquidated. So what now? Simple: Leave the plan in place! The blog will buy a December 2017 copper(x2)/gold spread on a close at -$5k or less, buy another one on a close at -$10k or less, buy another one on a close at -$15k or less, etc. The purchase intervals are set every $5k lower.
On the other side of the coin, any purchased positions will be liquidated on a close that is $5k or better than the interval purchase level. Note that the liquidation targets are based on the scale intervals, not the actual purchase price. This means that any better-than-expected purchase prices will result in even bigger profits when it is finally liquidated.
If the copper(x2)/gold spread just goes to the moon from here and never dips back down into the scale trade zone, we will simply look elsewhere for other scale trading opportunities. The strategy is applicable to most traditional commodities. Therefore, we don’t have to be dependent on the metals or any one commodities sector.