Quote from empee:
im referring to NQ v Ym or YM v ES or NQ v ES etc, not ES vs cash index. I'm talking about pairs that are normally correlated.
Pabst: a) I referred to using stops (ala what LTCM didnt do), b) I'm talking about the relative relationship. ES/NQ/YM move generically together. Today they were out of sync. It happens from time to time, however when it does its almost 100% right (its the highest percentage winning trade, even higher than reversals) I've seen yet hardly anyone talks about it.
You can use different methods to measure, for example, distance from MAs, etc.
Even when these go "out of sync" they tend to re-sync then go out of sync again, meaning there is a period most of the time where they syncronize and you can exit the trade.
This really isnt any great secret, its just obvious sometimes like the pullback in DIA and versus QQQQ (less), that doesn't mean QQQQ doesn't bounce, but if it does DIA will bounce more, and if it sinks QQQQ will sink more.
Of course its possible that it goes farther (as a pair trader knows) and thus you have stops, but to be honest I've yet to have the spread go wide enuff to stop me out and I've never had a losing trade. (The method I use to measure usually produces fewer than 6-8 trades per year) but so far all have been profitable.
I say this because for a conservative porfolio you could arb the difference and still generate a decent return (generating returns in short-term yielding instruments while not in these trades) or using other strategies.
So the point I'm making is why don't more ppl talk about this when the win rate is so high, is it because its not tradable everyday?
Before you go tagging me you'll note I've posted more than once on the YM thread how YM/ES/NQ lead/lag each other from time to time.
(I suppose you could arb those intraday but I look for bigger moves and am a swing trader).
I'd also like to reinforce that yes I know there is the possibility of "black swans" or 9/11 events that could cause the spreads to widen before you can stop out, and I also note that I have stops (very very wide) in case an event does occur that allows one to stop out.
So I'm not referring to holding this until they re-sync, there is a stop point.
(I bring this up cause I'm not referrin gto a strat that generats +10 NQ, +10 NQ, +10 NQ, +10 NQ , -200 NQ points type examples).
