Futures spread trading

[pbylina]

Quote from Rationalize:

You're thinking about some of the the right problems ;o)

Edit:

1. Yeah, but this can be automated.
2. What timeframes are the combinations reverting in?
3. May need more math than that if you want to win.
4. Yes, & loosely.
5. Depends if you want to be dollar or vol (volatility) neutral.
6. FX is spread traded, although those smelly fx guys might not talk about it in those terms.
7. Short the leader, long the lagger for convergence. I can�t comment on divergence trading.

1. Yes, I think I will need to have a spread manager made. I dont know if it is that necessary to have an automatic spread entry tool because I can just hit the market on each of the 2 markets being spreaded. But the loss manager seems like a must so I dont have to monitor open PNL every second...

2. If your referring to the picture, it is just an example. I guess then one can use anytime frame. Maybe tick charts too?

3. I have a spread indicator... It has standard deviation bands... I am guessing that in between the green lines is 'fair value'.

5. I guess dollar neutral is better. So 1 to 1.

6. Yes, COT report says FX is spread traded a little. But when you look at COT report for AGS...What a difference. It would seem that since AGS are so heavily spread traded that there might not be any opportunities...I guess the only way to find out is to see for myself.

 

[sle]

Quote from bone:
In fact, in terms of my own personal trading I can acheive Sharpe Ratios above 5.0 and max monthly drawdowns averaging less than 40% of an average monthly net return swing trading futures spreads.

Let me ask you to confirm - are you are generating profits with a Sharpe ratio of 5+ and over 2 profit/mdd ratio on a strategy that appears to be relatively unconstrained capacity-wise? In that case, why are you running an advisory business and not flying private airplanes with playboy models?

 

[dumb_mother]

Quote from sle:

Let me ask you to confirm - are you are generating profits with a Sharpe ratio of 5+ and over 2 profit/mdd ratio on a strategy that appears to be relatively unconstrained capacity-wise? In that case, why are you running an advisory business and not flying private airplanes with playboy models?

you are just silly. need millions in capital to generate the returns you are talking. i trade with a six-figure account, generate in excess of 75% returns / year with a max drawdown of 30% in my career (7.5 years now) and i still find that i make barely more than i spend each year so my account doesn't really grow at all. eventually my wife will have an income and i won't be withdrawing all of my profits each year- at that point it will grow. but these are just naive statements you make. it takes an awful lot of money to break orbit and grow your account exponentially if you are also paying all of your bills out of the same account (especially if you live the "somewhat high" life)

 

[sle]

Quote from dumb_mother:
you are just silly. need millions in capital to generate the returns you are talking.

I think it's you who are being silly. If you have a 5+ Sharpe strategy with good other metrics that scales you can approach any quant fund allocator and get a few bucks to start. This said, through my years in the business the only people I've see that generate real-life returns with Sharpe higher then 2-3 or so (at the fund level!) are HFTs that are severely capacity constrained.

 

[oldtime]

Quote from pbylina:

I have a couple of questions:

1. Since spread trading is relying on the widening or narrowing of a spread, stop losses on each leg are not practical? Rather one should exit with a loss manually if the spread widens too much when we are betting that it will narrow?

2. What time-frames are usually used? Daily? Minute?

3. How does one find spreads? First you have to find highly correlated markets? Do you chart them both and look for divergence?

4. Do you take profits when they go back to normal? Is it called 'fair value'?

5. What is balancing legs? If I were to spread EURO vs GBP, since EURO is 12.50 and GBP is 6.25, would I use 1 euro to 2 GBP? Or since GBP moves more I would leave it at 1 to 1?

6. I was doing some research and it seems that Agricultures are heavily spread traded but FX is not. Why is this so?

7. In the picture, would I go long the top one and go short the bottom one? Is this how you find spreads, look for divergences?

1. I don't know how they do it today, but in the old days if you were trading intramarket you could just instruct the broker to buy the spread for a nickel and sell the spread for a dime

2 and 3, Talk to bone, that's all he does is look for spreads, he follows over 120 mkts.

4. Trading for reversion to the mean is the best way to lose more than you anticipated

5 and 6. EUR/GBP is the spread, you can balance it by adding EUR/USD or something. FX can be traded in any amount, so you could have on 25k on one pair and 30k on another.
The hard part is to avoid getting cancelled out

7 most look for a spread that is moving, many feel that a moving spread is more likely to trend than a moving outright

 

[pbylina]

Quote from oldtime:

1. I don't know how they do it today, but in the old days if you were trading intramarket you could just instruct the broker to buy the spread for a nickel and sell the spread for a dime

2 and 3, Talk to bone, that's all he does is look for spreads, he follows over 120 mkts.

4. Trading for reversion to the mean is the best way to lose more than you anticipated

5 and 6. EUR/GBP is the spread, you can balance it by adding EUR/USD or something. FX can be traded in any amount, so you could have on 25k on one pair and 30k on another.
The hard part is to avoid getting cancelled out

7 most look for a spread that is moving, many feel that a moving spread is more likely to trend than a moving outright

120 Markets! Jeeze, how many monitors does he have?

So if you dont trade for the reversion to the mean, you trade it going away from the mean?

What is a moving spread? Spreads trend? Interesting...I need to chart some spreads this week...Exciting stuff!

 

[oldtime]

Quote from pbylina:

120 Markets! Jeeze, how many monitors does he have?

So if you dont trade for the reversion to the mean, you trade it going away from the mean?

What is a moving spread? Spreads trend? Interesting...I need to chart some spreads this week...Exciting stuff!

I didn't say you don't trade for reversion, what I meant was if that's all you are hoping for it may widen farther than anybody ever thought was possible, be careful.

If you really want to feel what it's like to have your head in a vice put on one where both legs move against you.

 

[pbylina]

Quote from oldtime:

I didn't say you don't trade for reversion, what I meant was if that's all you are hoping for it may widen farther than anybody ever thought was possible, be careful.

If you really want to feel what it's like to have your head in a vice put on one where both legs move against you.

Ok I understand you know. Thanks for the clarification. Yes I will use the tape to try to get in at the right time.

 

[booked]

What's that spread indicator from?

 

[Rationalize]

Quote from pbylina:

1. Yes, I think I will need to have a spread manager made. I dont know if it is that necessary to have an automatic spread entry tool because I can just hit the market on each of the 2 markets being spreaded. But the loss manager seems like a must so I dont have to monitor open PNL every second...

2. If your referring to the picture, it is just an example. I guess then one can use anytime frame. Maybe tick charts too?

3. I have a spread indicator... It has standard deviation bands... I am guessing that in between the green lines is 'fair value'.

5. I guess dollar neutral is better. So 1 to 1.

6. Yes, COT report says FX is spread traded a little. But when you look at COT report for AGS...What a difference. It would seem that since AGS are so heavily spread traded that there might not be any opportunities...I guess the only way to find out is to see for myself.

1. At higher frequency, a large part of the strategy is about *not* paying the bid/ask on the wider leg. So you may not want to "hit the market on each of the 2 markets being spreaded".

2. The timeframe is important if you care about the reversion behaviour of the combination over time.

3. Something like that. Does your mean move?

4. There is no 4.

5. Depends. Why would you not try to match the volatilities?

6. I would not bother with those numbers. But that's just a view.

In my view this is a medium / high frequency strategy. Making money on longer timeframes, and keeping, it is harder imo. "Harder" as in: degenerates towards randomness as new information perverts the relationships.