Futures spread trading
- Thread starter Lucias
- Start date
Well, if you are adding to a shitty spread, and you get cute by adding legs, that usually just makes things much worse. I cannot imagine very many (if any) scenarios where a trader is underwater in a two-legged spread, and that by adding a leg or two makes things better. It is true that adding legs can suppress a spread's volatility characteristics but that is highly dependent upon your specific market's forward curve characterisitcs - in terms of interest rates duration out on to the forward curve adds volatility, as opposed to the energy and softs.
Personally, I will sometimes press a trending winner in the spreads, and I only 'add' to a position that is marking down modestly through scales in order to arrive at a pre-determined sizing for that particular position's entry.
Spreads typically trend very hard. 95% of the positions I put on I am going to be underwater on sometime during it's lifespan. But I am not fading for mean reversion back to some value area - there is diversion away from value areas that trend as well.
In terms of my modelling, I really do not care if the market is diverting or converging torward some sort of pre-determined 'value area'.
yeah, but when both sides are winning, or the unrealized profit is more than any rational trader would consider reasonable, I don't know what to do but just take it and sort it all out later.
When it comes to spreads, trends vs reversion is the most interesting topic.
I listen to one side and I say, "You're right.
And I listen to the other side and I say, "You're right."
YOU'RE BOTH RIGHT!
When it comes to spreads, trends vs reversion is the most interesting topic.
I listen to one side and I say, "You're right.
And I listen to the other side and I say, "You're right."
YOU'RE BOTH RIGHT!
Like back when I was scalping ES. In retrospect, long term, ES was in a down trend, but day to day it was very choppy.
But if you charted it against NQ it was as smooth as a baby's bottom.
And I'm not talking about those diaper rashed kids I raised, I'm talking about the first girlfriend I had after I got divorced.
But if you charted it against NQ it was as smooth as a baby's bottom.
And I'm not talking about those diaper rashed kids I raised, I'm talking about the first girlfriend I had after I got divorced.
If spreads have a propensity to trend, this prompts the question: Are some trend identification techniques better suited to spreads vs. outrights?
There are many conventional approaches to identify trends for outrights. For example, breakouts, momentum, multiple time frames, etc. Are these methods just as effective with spreads, or are there techniques which are superior for identifying trends in spreads?
Not yes, but oh hell yes. Technical analysis, whether for trend or some other moniker, is most effective for spreads when it has been designed for the species. Spreads definitely have different price and volume behaviors than flat price outright instruments, and need to be modelled accordingly in order to get the most out of the system. And on this I am afraid I cannot elaborate further.
I agree with Bone that there is so much proprietary stuff out there that he does and that I do that I would never enlighten anyone as to my exact methods. While many technicals can be used, don't overlook the fundamentals, like what happened with the CN/WN spread this year. Also, in the ags, the old crop/new crop is traded by the big grain companies and observations what they are doing may give you a clue.
Agree.
I think that the biggest positive for using a very good technical system designed specifically for spreads would be to broaden your exposure to several market spaces like energy, interest rates, softs, metals, etc. on a simultaneous basis. Are there fundamental interest rate and ag spread traders who are successful ? Of course. Only difference is that it would be tougher to adapt a fundamental model that works with ags into another completely different space like interest rates. The appeal for the technical model would be the trader who would like the diversity for being long Dec 11-Dec Eurodollars, being short Sept 11 - July 12 Corn, and being long the Sept. 11 Heating Oil Crack - simultaneously.