Calendar Spread Mean Reversion

Entry Logic

• Long Entry: The spread between a front-month futures contract and a back-month futures contract widens beyond its normal range. Sell the spread (sell the front-month, buy the back-month).
• Short Entry: The spread between a front-month futures contract and a back-month futures contract narrows beyond its normal range. Buy the spread (buy the front-month, sell the back-month).
• Confirmation: The spread begins to revert to its mean.
• Timeframe: Daily.
• Location: Extreme reading on the calendar spread.
• Market Condition: Any.

Exit Logic

• Profit Target: The spread returns to its historical mean.
• Scaling Out: No.
• Trailing Stop: No.
• Signal Failure: Exit if the spread continues to move against you.
• Opposite Signal: Not applicable.
• Time Expiration: Hold until the front-month contract approaches expiration.
• Momentum Loss: Exit if the reversion stalls.

Stop Loss Structure

• Hard Stop: A pre-defined maximum spread width.
• Soft Stop: If the spread does not start to revert.
• Max Dollar Loss: Varies by contract.
• Max Percent Loss: 3%.
• Structural Stop: Not applicable.

Risk Management Framework

• Risk Per Trade: 1.5%.
• Daily Limit: Not applicable.
• Weekly Limit: 5%.
• Max Drawdown: 15%.
• R:R Requirement: 2:1.

Position Sizing Model

• Sizing Approach: Based on the margin requirements of the spread.
• Volatility Adjustment: No.
• Conviction Sizing: No.
• Scaling In: No.
• Scaling Out: No.

Trade Filtering

• Market Conditions: Best in commodities with clear seasonal patterns or cost-of-carry models.
• Setups: Requires a clear statistical deviation in the spread.
• Instruments: Commodity futures (e.g., Crude Oil, Natural Gas, Corn, Soybeans).
• Time Restrictions: None.
• Chop/News Avoidance: Be aware of news that could affect the term structure (e.g., inventory reports).

Context Framework

• Trend Direction: Not applicable.
• VWAP Relationship: Not applicable.
• MA Relationship: Not applicable.
• Range Location: At an extreme of the spread's historical range.
• Higher TF Alignment: Not applicable.

Trade Management Rules

• Breakeven: No.
• Scale Out: No.
• Add Size: No.
• Fast vs Slow Moves: This is typically a slow-moving trade.

Time Rules

• Optimal Window: Any.
• Times to Avoid: The week of the front-month contract's expiration.
• Session Notes: A classic strategy for commodity traders.

Setup Classification

• A+ Setup: A large, statistically significant deviation in a spread with strong seasonality.
• A Setup: A moderate deviation.
• B Setup: A minor deviation.
• C Setup: No clear opportunity.

Market Selection Criteria

• Instruments: Liquid commodity futures.
• Volume: High.
• Volatility: Moderate.

Statistical Edge Metrics

• Win Rate: 70-80%.
• Avg Win: 2R.
• Avg Loss: 1R.
• Profit Factor: 2.8.
• Expectancy: +0.9R.

Failure Conditions

• Market Conditions: A structural change in the supply/demand dynamics of the commodity.
• Specific Scenarios: A major weather event, a change in government policy, etc.

Psychological Rules

• Discipline: Requires a deep understanding of the underlying commodity and the factors that affect its term structure.

Advanced Components

• Regime Detection: Be aware of whether the market is in contango or backwardation.
• Filters: Avoid trading spreads with very low open interest.
• Correlation: Not applicable.
• MTF Alignment: Not applicable.

Location

• Strongest: In commodities with predictable seasonal patterns.
• Weakest: In commodities with no clear seasonal or cyclical tendencies.