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Profit in DM-SF spread



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You say you like to see reports of profits. I received a question about
whether or not I entered this spread, so I guess I should give you a report:

A few days ago, I gave you the entry signals for this spread and we were
watching the Dec and Mar contracts for a move in the ratio of SF/DM to
exceed 123.05%.  A day's end data would not show you that it happened but
intraday it hit about 123.35% in March K.  I was out at the moment and
unfortunately entered a little later than I should have preferred.  

My entry was at -12.80.  Profit occurs when that number is reduced.  It has
been a little better than yesterday's close, but yesterday's close was
-11.97.  I had a drawdown of approximately $150 before the profitability
showed.  If I had entered immediately after the 123.35%, I would have had no
drawdown.  

Actually, one day showed a drop of nearly 100 points. That recognizes a
profit of $12.50 per point on each contract.  When do we exit?  I explained
that if we take two contracts we can close one when we reach a profit of
around $2,000 to $2,500.  Wait then on the other which could get $5,000 or
better.  Obviously, if it goes against us, we could get out after a profit
as now is in hand before going into a drawdown.  I originally suggested a
possible drawdown of approx $1,000.

Would I enter now if I had not already?  Not, if I go by my entry rule.
BUT, I missed one last year that was beautifully profitable. Over riding the
entry rule would have worked last year very well.  Welles Wilder also argues
that entering while a trend is underway is good.  He argues that people say
they won't chase, but that means they must always enter before the turn?
Anticipating turns to reverse has cost a lot of money, so it makes sense to
enter after you know the trend.  

You know what I am doing now?  I am talking myself into modifying my rule
and entering this again the first time it reverses for three days.  I
already have an open order to enter at -12.85 but that is a long way from
where it is now.  I'd be surprised if it reverses that much.  

Testing shows that over a hundred trades could have been taken in the
several years test period and all of them had profits at some point.  If we
use the exit rule of about $2,200 profit for first exit, approximately 5% of
the spreads lost to the draw down of $1,000.  All of them would have been
profitable at some point.  The one I am in now, may reverse and bite me, but
there is a profit there now. Right?

OK, so here is the follow up.  If you like, I will report again when this
spread is exited finally.


Consider Practicing Random Kindness 
(Read RAK's in Reader's Digest May 1992)
Roy C. Sampley
rsampley@xxxxxxxxx