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Normal or inverted?

For this discussion, note that spreads can trade with the front month higher than the back, and vice versa. You can use this fact as a valuable forecasting tool, a discussion best saved for Chapter 8, “The Advanced Futures Trading Course (Or How to Analyze the Markets Technically).” I'll end this particular discussion of spreads with a caveat. Because the margins are generally much lower on spreads, there is a natural tendency to overtrade, or put on too many. Just because spreads are limited risk does not mean there isn't risk; on occasion, spreads can actually entail greater risk. A number of years ago, a friend of mine had the long July/short December cotton spread. One afternoon after the market's close, a change in some government policy was announced. Although I've forgotten the specifics, I do remember that the next day the market opened limit down in the July and limit up in the December—the result being he was hit to the max on both sides!


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