Jul

22

I have briefly conversed with two of of the more experienced traders on this site in recent days.

Our chat has surrounded price spreads between exotic real assets and the current valuation thereof.

Arguably, when dealing with the relativities between somewhat exotic 'real' things like Tin versus Aluminium (and yes Americans that IS how it is spelt!) that a purely quantitative or systematic approach is not sufficient. It is this reason (in addition to the the triggers below) that explain why I would never sell Silver/buy Tin as a spread trade. Conversely I have no problem being long stocks/ short bonds or other financial assets (for example).

History is replete with examples of great traders brought low by these types of trades real asset spread trades.

Almost regardless of how compelling the spread level appears, it is usually only those who grow, mine, harvest or ship the commodities concerned that make money. Likely, this is due to a combination of a genuine understanding of the flow and low to zero leverage.

It is possible to do these trades and, more importantly, exit them with a reasonable proportion of the maximum available profit. However, as has been imparted to me, any size big enough that the players notice is bound to attract penalty rates on exit.

There are similarities to trading Emerging Market currencies in some ways. For example:

You must secure your funding.

One must understand substitutability in case your short cannot be covered.

In the off chance that you out manoeuvre the real players, be prepared to graciously hand them 10-30% of your profit to replay their magnanimity in allowing you to escape their world with a slight overplus.

Anatoly Veltman writes:

A counter-query: isn't it more desirable for "wrong crowd" markets to carry you to profit, making exit easy? Why take on Commercials?

You rightfully point out that Entry at times may appear a no-brainer, but in a narrow specialized market you're likely one of the last to notice
 


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