Introduction

At the beginning of each month, we release the list of the most promising outright and spread futures contracts. This list requires certain statistical properties, in term of the width of the seasonal window (at least 25 days) and an average gain ratio (ratio between the enter and exit value or vice-versa) greater than 2. However, all these statistical signals do not guarantee the current contracts will follow the same patterns. 

Here, we show the full list of our proposed spread contracts (in case you are not familiar yet with the tickers you can download the full list of CME tickers here).

Soybeans Oil

This month we have proposed 15 spread contracts. Among those, the spread Soybean Oil July 2019 - September 2019 (BON2019 - BOU2019) having recommended window May 2, 2019 - June 11, 2019.

Therefore, the seasonal window is approaching, in addition, the spread has encouraging properties (see figure 1): first the trend curves (5 and 15 years) are very similar, in addition, the correlated spread (it is correlated with the 2000 and 1989 years) is similar to both curves. Second, figure 2 shows the RSI and it is in normal condition, which means between 50-70. 

Figure 1. BON2019 - BOU2019. The figure exhibits the spread closing price (blue), 15-year trend (green), 5-year trend (red), Bollinger bands (orange and yellow) and rolling mean (black).

However, if we zoom in, it turns out an entry signal (divergence between spread and RSI) is forming. 

Figure 2. BON2019 - BOU2019. Relative strength index (RSI) of BON2019 - BOU2019 spread.

On the other hand, the current spread is among the lowest in the last 15 years (figure 3). Is it reasonable to expect an additional drop of this spread? At first glance, it turns out that the contango histogram (figure 4) shows that July and September contracts are, statistically speaking, likely in contango (further delivery months have higher prices).

Figure 3. BON2019 - BOU2019. Spread between BON-BOU in the last 15 years.}

Figure 4. BON2019 - BOU2019. Contango histogram of the spread between BON-BOU in the last 15 years.

As a final comment, this spread had been profitable 15 times in the last 15 years, therefore, we should not be worried by the lower spread.

Crude Oil

This section delves into the proposed calendar spread WTI Crude Oil November 2019 - December 2019 (CLX2019 - CLZ2019). The estimated seasonal window starts around May 14, and finishes around June 7, it has been profitable 14 times in the last 15 years, in the proposed window. 

Figure 5 shows the spread, together with Bollinger bands and pattern curves. There are not correlated spreads (the spread 2016 is the most similar with a correlation of about 70%) in the past, however, the two pattern curves (green and red) are pretty similar. Furthermore, the current spread has a good position (close to the statical patterns), and it has a growing trend since last December. 

The spread curve touches the (20 days) rolling mean, in addition, the Bollinger bands come close together (squeeze) which means the volatility is decreasing.

Figure 5. CLX2019 - CLZ2019. The figure exhibits the spread closing price (blue), 15-year trend (green), 5-year trend (red), Bollinger bands (orange and yellow) and rolling mean (black).

It is likely the spread keeps growing before an entry signal occurs. Actually, it seems there is the presence of divergence, however, the expected seasonal window is in about ten trading days and the RSI (figure 6) even if it is normal (between 30-50), it seems slightly low for a supposed bearish trend.

Figure 6. CLX2019 - CLZ2019. The relative strength index (RSI) is in a normal region, between 50-70.

Figure 7 tells us the current spread values are average in the last 15 years. It turns out that in the last 15 years this spread has been in contango and backwardation.

Figure 7. CLX2019 - CLZ2019. Spread CLX - CLZ in the last 15 years.

This is exactly what the contango histogram shows (figure 8): a bimodal (double local maximum) behaviour, in fact, statistically speaking, it is not unusual to find this spread in backwardation like the current year.

Figure 8. CLX2019 - CLZ2019. Contango histogram of the spread between CLX-CLZ in the last 15 years.

Conclusion

In this report, we have given an explanation of the two calendar spreads. The first is a spread on Soybean Oil, which shows promising features. The second is a spread on Crude Oil, this also present good statistical properties, however, it seems wiser to await we approach the proposed entry date.

The calendar spreads proposed together with the graphs are based on the statistical tools present on Tradology.

Introduction

This report deals with the next upcoming seasonal trading strategies on outright and spread futures contracts. In particular, the report is released in advance in order to guarantee an adequate study.

Here, we present some of the most profitable (according to our statistical analysis) contracts.

Wheat July 2019

In the report Vol. I, No. 6, March 2019, we proposed two trading strategies about the wheat (SRW). It turns out that, the futures contract Wheat July 2019 (WN2019) during May 2019.

Figure 1. WN2019 seasonal trends.

In figure 1, the red line stands for the statistical trend in the last 5-year trend, while the green one for the last 15 years. First, we notice that (statistically speaking) the seasonal window should start around the 24th. May 2019 and finish around 15th. June 2019, therefore is shorter than a 30 trading days and in the last available month before the delivery. In addition, it seems the trend in the last 5 years is not so neat as the green line, however, it could be caused by an average effect, since outright futures are more volatile than spreads. In this futures contract, assuming we took a position at blinded eyes, we would succeed 12 times in the last 15 years according to the above mentioned seasonal window dates.

Figure 2. Price of the Wheat July contracts in the last 5 years.

A useful tool is the stacked plot, which is shown in figure 2, it turns out the current Wheat July price is rather similar to the last 5 years. The last USDA report (March 2019) tells us that the March projection of the ending stocks is about 28.72 Million Bushels, while the ending stocks were about 29.92 and 32.13 Million Bushels, respectively in the seasons 2016/2017 and 2017/2018. Which means it is likely the wheat will have a lower price than last year since the wheat season is not yet finished and it is possible the ending stocks will be larger and therefore a surplus of wheat. In this case, it could be interesting to check the historical temperatures in the South/East USA, where the Wheat SRW grows.

Figure 3. Average temperatures in the wheat belt.

Figure 4. Average precipitations in the wheat belt.

According to the data available on weather.gov, it turns out that while January 2019 was mild with gentle rain (see the charts in figure 2 and 3), February and March 2019 were among the driest and coldest in the last 18 years. These figures might enhance wheat production.

Figure 5. Price of the Wheat July contracts in the last 15 years.

The figure 5 displays the Wheat July price in the last 15 years, and it confirms that the current price is normal (i.e. no minimum nor maximum).

In conclusion, this contract could be a very good trading opportunity, it is likely the mild weather supports lower prices.

Soybeans Oil Calendar Spread

In this section, we deal with a calendar spread between Soybeans Oil August 2019 - Soybeans Oil August December 2019 (BOQ2019-BOZ2019).

The figure 6 shows two seasonal trends (5 and 15 years, respectively in red and green), in addition, it is shown a correlated spread (with a probability higher than 80%) in water blue. It turns out the correlated contract is in agreement with the historical trends, which is a good sign.

Figure 6. BOQ2019-BOZ2019 seasonal trends (green and red) and correlatated spread (water blue).

In this spread the seasonal window starts on the 10th. May 2019 and finish around 5th. June 2019, which it is shorter than 30 trading days.

However, the most significant information is that the two historical curves (green and red) present, essentially, the same trend in the seasonal window. According to the seasonal window, this spread had been profitable 12 times in the last 15 years.

Figure 7. BOQ2019-BOZ2019: comparison of the last 5 year.

According to figure 7, the spread is at the minimum of the last 5 years. The (February) USDA report shows that the imports are stable at about 300 Million Pounds, the domestic demand is growing. Although the exports are growing, the ending stocks are growing as well, and this implies lower prices. However, a more detailed analysis can be made with the next upcoming USDA report.

The figure 8 compares the current spread with the last 15 years, and it turns out it is not at the minimum of the last 15 years. In addition, it does not exhibit high volatility contrary to 2004 and 2013. 

Figure 8. BOQ2019-BOZ2019: comparison of the last 15 year.

Conclusion

This paper has dealt with some two trading strategies, one for an outright futures contract and the second one with a spread contract. The proposed trades highlight very interesting properties. However, we will follow these contracts and wait for an entry signal. In addition, further recommended trades for May 2019 can be found on Tradology, we are pleased to help you in your trading strategies.

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Introduction

Nowadays, there are many methods to trade online. In this paper, we give a brief overview of each market

Forex

The Forex is the foreign exchange market also known as the currency market. It is a global decentralized or over-the-counter market, which means it is done directly between two parties without any supervisions. This certainly implies lower fees in opening an account, but at the same time the default from one party may come up because there are not predisposed institutions in regulation. However, forex is the most liquid market and always open. Therefore, it requires to analyse the market several hours per day, and in case of hedge the risk with a differentiated portfolio (which is always a good idea). In addition, many economists such as Milton Friedman argues that while investment in traditional financial instruments like bonds, stocks, futures and options (regulated) often is considered to contribute positively to economic growth by providing capital, currency speculation does not.

Cryptocurrency

A cryptocurrency is a digital asset which employs strong secret key to secure the financial transaction. It is certainly one of the most sensational inventions of the last decade with the most famous bitcoin. In principle, everyone can generate their coin (for instance bitcoin) by mining. To make the story short, the mining consists of finding a new secret key, the drawback is the energy cost. However, it is possible to trade cryptocurrencies in certain regulated forex markets (there are also futures contracts associated with the bitcoin). Normally, the cryptocurrency prices are very fluctuating (volatile) and therefore, it is needed regulation in order to avoid a possible default. This is one of the reasons why many countries, exchange limit the trading. Because, the volatility and the lack of historical data in some cases, it also requires a high education level.

CONS:

1. Cryptocurrencies are very volatile;
2. there are many scams on crypto and forex;
3. many scams on crypto and forex;
4. it requires a remarkable time by analysing indicators.
   

PROS:

1. Easy to access;
2. easy for low budget;
3. large community and bibliography.

Stocks

A stock (share) is essentially fractional ownership of the associated corporation. The owner of the stocks has the ownership of the corporation according to the percentage of the held shares. In addition, stocks can be bought and sold privately or on stock exchanges. In the latter the biggest companies list their stocks, therefore stock exchanges are rather liquid. Nowadays, all the banks have the option to trade in stocks, and in some cases, they have an ad-hoc portfolio according to your education level. Normally, trading in stocks is worth in the long term or in case of large investment capitals.

CONS:

1. It is for persistent persons;
2. managed portfolios imply very low returns (~1% annual);
3. it requires large budget.

PROS:

1. Easy to access;
2. large bibliography.

Options

An option is a financial contract which gives the owner the right (but not the obligation) to buy or sell an underlying asset at a specified price. Therefore, the owner has not the obligation to buy or sell. However, contrary to other financial contracts, the owner has the obligation to pay in advance, and therefore this corresponds to the maximum risk the holder can face. There are two types of options: call (buy an option) and put (sell an option). The options are often used to hedge the risk, for instances, import/export companies typically employ options on currencies, airline companies use options to circumvent the high variability of oil and kerosene. Therefore, the option is certainly one of the most traded contracts. To trade options is certainly needed an adequate education level and practice.

Furthermore, during the last decade, among low-skilled traders the binary options have become very popular. Essentially, in a binary option, you have only two choices: you can bet if the price grows or drops. In total agreement with the most recognized financial institution, we would like to warn you and bear in mind that binary options are prone to fraud and it is comparable as a form of gambling. In essence, many binary options are an unfair game, as the roulette, and like an unfair coin, therefore before opening an account on binary options do not forget to check whether the broker is trustworthy.

If you are interested in trading options, we recommend checking the  Securities and Exchange Commission (for USA market) which gives a list of approved exchanges.

CONS:

1. It is for persistent persons;
2. it requires a remarkable educational effort.

PROS:

1. It is possible to hedge the risk;
2. it is good for small budget holders (~3000 $);
3. average monthly return is about 8%-10%;
4. large bibliography.

Futures

The futures is one of the oldest financial contracts. In summary, it is a legal agreement which gives to the owner the right to buy or sell the underlying asset. Essentially this is a standardized contract where the underlying assets can be traded in the exchanges (for instance CME, LIFFE, EUREX, etc), in addition in these ecosystems, there are entities which ensure the contract terms are honored. This is because they prevent a possible default from one party. The details of this contract are known in advance, and the main ones can be summarized as follows:

• price (normally in USD per volume unit);
• delivery time (year and month);
• size (total volume);
• margin (normally in USD).

Together with stocks, options and bonds, the futures contract is one of the most rewarding types of trading. Contrary to options, to buy (or sell) a futures contract does not require to pay in advance, but the broker requires a minimum balance which is correlated to the margin (it is proportional to the risk). Clearly, it is risky to trade futures without a guide, however, there are many methods to hedge the risk: spreads and trading seasonal contracts. There are many publications and courses in this field, in addition, if you want to get an idea you can check our free course  on futures trading. Together with adequate practice, you will be able to trade futures in 4/6 months.

CONS:

1. It is for persistent persons.

PROS:

1. The daily trading requires low effort (maximum 30 min daily);
2. it is possible to hedge the risk with seasonal trends;
3. it is good for small budget holders (~3000 $);
4. average monthly return is about 4%-6%;
5. large bibliography;
6. free course, and support on Tradology.

Conclusion

In this report, we have given an overview of the most popular methods to trade. Whether you decide to trade forex, options, stocks or futures bear in mind to do it with the right approach and with an adequate educational level, otherwise, the default is around the corner. Finally, we have proposed a free course on futures trading, where you will have the needed information and will be assisted as soon as you are independent, just register on Tradology.

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Introduction

The wheat represents one of the most traded grains worldwide. A new spring is coming, and therefore, the wheat season is about to end.

It turns out greedy trading opportunities might occur.

World Statistics

The US of America is always a top producer of wheat. In 2018, the USA produced about 47 millions of tons, ranked as the fourth country in the wheat production.

In the last 5 years, the US wheat supply has been roughly 10% of the total world production, as it is shown in the figure 1.

        Figure 1. Percentage of US wheat production (USDA).

US Statistics

The US production is composed of six types of wheat:

1. Hard Red Winter (HRW);
2. Hard Red Spring (HRS);
3. Soft Red Winter (SRW);
4. Soft White (SW);
   
5. Hard White (HW);
6. Durum.

The Chicago SRW (soft red winter) Wheat accounts for 15 to 20 percent of total production, is grown primarily in States along the Mississippi River and in the eastern States (see figure 2). SRW flour is used

for cakes, cookies, crackers, and other wheat products made from low protein flour. 

                                Figure 2. Map of wheat location (kswheat).

The figure 3 highlights a drastic decrease after the season 2013/14 the SRW wheat production, in addition, the (USDA) projections show an increasing spread between planted and harvested crops.

 Figure 3. Soft Red Winter wheat. The graph exhibits the percentage of SRW wheat production (blue), planted (orange) and produced (red).

Furthermore, the figure 4 shows that while the total US supply is decreasing (blue curve) in the last years, the exports are growing (green curve). Therefore, the last two figures might suggest that in the last years the wheat price is increasing.

Figure 4. US wheat supply and demand. The graph shows the time series of supply and demand (in millions of bushel). They are composed by production (blue), total supply (red), internal use (yellow) and export (green).

Wheat

This section deals with the wheat futures. In fact, as it is highlighted in figure 3 and 4, we would expect a wheat price higher during the last years. It turns out the last delivered contract (WH2019) was effectively above the previous four years.

                            Figure 5. Wheat March 2019 futures contract (Tradology)

We now take into account the WK (Wheat May) contracts, it turns out (see figure 6) the current contract (the year 2019) was above the previous year until the end of February. Therefore, according to our earlier analysis, we expect the current contract grows after about two weeks of decreasing trend.

                            Figure 6. Wheat May 2019 futures contract (Tradology)

This forecast is supported by the wheat contango histogram in figure 7. Essentially, the contango histogram gives us an indication of the contango in the last 15 years. Since in average (and median), the wheat contract should be in backwardation while it is actually in contango. In fact, there is a new crop in July and therefore the supply should increase, which implies lower prices.

                        Figure 7. Wheat May 2019 futures contract (Tradology)

Spread

This section proposes a possible trading strategy on a calendar spread. This is the calendar spread WU2019 - WZ2019, and it turns out that it has been a profitable spread 13 times in the last 15 years.

                            Figure 8. WU2019 - WZ2019 graph (Tradology).

Conclusion

In this report, we have given an analysis of the supply and demand of the wheat. In addition, we have proposed a possible forecast relying on the statistics of the past years and in agreement with US supply and demand. Finally, we have proposed a calendar spread based on the statistical tools present on trends

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