One Dimensional Trading Strategies
One Dimensional Trading Strategies
Over the past forty years, commodity futures trading strategies have evolved. The impetus for change has been the advances and adoption of technology. The result has been the evolution of trading strategies that focus on the nearby contract or front month. The strategies that are limited to the nearby contract can be described as one-dimensional in the sense that they do not consider the orientation of successive contracts, a relationship commonly referred to as calendar spreads. A trading strategy limited to a one-dimensional approach will have mixed results over time. Empirical examples isolate the limitations of one-dimensional trading strategies.
April 20th, 2026, was a once-in-a-lifetime event for commodity futures traders. The May 2026 WTI crude oil contract traded at negative values, an event that hopefully will never be repeated. The weakness of the May contract happened for one reason and one reason only: traders were unable to arbitrage the May/June spread at any value. That is, the May contract became disconnected from the successive contracts at any value. Spread traders were aware of the May/June spread significantly breaching full carry by a significant amount in the trading days leading up to April 20th, and should not have been caught off guard by the weakness of the May contract. For one-dimensional traders that were only focused on the May contract, buy signals for the May contract were triggered by strategies that omitted spread analysis. At the end of the day, spread traders should have pivoted to a trade that profited by a change in the spreads (butterfly spread) while one-dimensional strategies that identified support levels inevitably sustained losses.
The advantage of a multi-dimensional approach is not limited to the energy sector. The recent strength of new crop canola has been the result of the July/Nov spread. One-dimensional strategies did not forecast the July/Nov orientation and its effects on the market. As a result, one–dimensional strategies were less effective at recognizing and establishing a desirable open position.
November 2026 Canola Futures
I have recently written about the Oat futures market. My intention was to bring attention to the excessive contango orientations and the long term effects. I have received responses from market participants that have provided rationale from both institutional and market perspectives that explain the current spreads. The takeaway should be that a multidimensional approach to trading that includes spreads provides a distinct advantage to a one-dimensional approach.
One-dimensional trading strategies that are limited to the nearby can produce desired results but have limits inherently built into their design. Spread trading strategies can stand alone as an effective strategy or supplement and complement one-dimensional strategies. Spread strategies have existed from the beginning of commodity futures markets and will continue to influence markets into the future.
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Trent Klarenbach, BSA AgEc, PAg, publishes the Klarenbach Grain Report, and Klarenbach Special Crops Report.
Klarenbach Research
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