Getting started with spread trading

F

Fedmayne

Hello everyone,

I would like to get more involved in spread trading as it appears that many experienced traders that have many years in the game tend to be trading spreads. I know there are some advantages and disadvantages to this form of trading but for me right now the biggest disadvantage is where to start.

From what I have read (and please correct me if I am wrong) is that a lot of consistency is possible when trading well-behaved spreads. I feel this would be a great advantage especially for someone like me that does not have six-figure or very high five-figure account balance.

I have a fair deal of knowledge as to how a spread is structured and works, only due to the generously donated knowledge found throughout these forums by various members.

In order to get started I need software that is capable of charting spreads of all types including calendars, butterflies, condors, synthetic, etc. I want to be able to utilize every symbol possible to create my own trading scenarios. The problem for me is that any software that is capable of charting these combinations is over $1000 a month which for me is far too much especially since there will be some time between learning the software and actually trading the various spreads.

Is there a specific software that anyone can recommend for charting and building spreads? Are there any broker recommendations that can be made if this is the route I want to go? From what I have read it seems that there is an enormous difference between brokerages when it comes to sophistication, margin calculation, span credit, etc., etc..

Thank you everyone for your contributions.
 
Good broker - Interactive Brokers, though they are not perfect, still I can not see anything better for retail traders.

Do you mean futures spreads? Or some stock/ETFs pairs/triplets?

For futures spreads:
Over $1000/month ? Hey, this is not true... Absolutely TOP solution is under $500/year! Search engine for finding good trade opportunities and it has charting and alert system too... :D

I even have one solution available which is free - it was programmed by my colleague at first for his personal needs, but finally he has decided to provide it to others too.... Of course this free solution is not so smooth, but it is working.

Private message sent...

For stocks/ETFs pairs/triplets:
From my experience it is best to program it yourself, can be done thru Excel + VBA, though professional programmers will tell you, that this is not the most elegant solution.
Do you have some knowhledge about cointegration vs. correlation, beta neutrality, some mathematical models how to enter/exit trades?
 
Yes, this would be for futures trading. I would like to do some intraday strategies. From what I have read, the energy spreads in their various forms have the volatility for worthwhile intraday trading.
 
tom_czr said:
Good broker - Interactive Brokers, though they are not perfect, still I can not see anything better for retail traders.

Do you mean futures spreads? Or some stock/ETFs pairs/triplets?

For futures spreads:
Over $1000/month ? Hey, this is not true... Absolutely TOP solution is under $500/year! Search engine for finding good trade opportunities and it has charting and alert system too... :D

I even have one solution available which is free - it was programmed by my colleague at first for his personal needs, but finally he has decided to provide it to others too.... Of course this free solution is not so smooth, but it is working.

Private message sent...

For stocks/ETFs pairs/triplets:
From my experience it is best to program it yourself, can be done thru Excel + VBA, though professional programmers will tell you, that this is not the most elegant solution.
Do you have some knowhledge about cointegration vs. correlation, beta neutrality, some mathematical models how to enter/exit trades?
More...

I do have some knoweldge about correlation but not so much about cointegration. It seems that futures spreading has very little available in formal education for the retail crowd. It seems like this arena of trading is overwhelmingly dominated by professional players.
 
Erinn said:
Yes, this would be for futures trading. I would like to do some intraday strategies. From what I have read, the energy spreads in their various forms have the volatility for worthwhile intraday trading.
More...

1. There are some mid-level charting packages like eSignal that can do a decent, functional job at charting spreads. I start my clients out using delayed data, because it is much cheaper, and if you need an instantaneous quote you can always look at your trading platform's order book.

2. Intraday spread trading has evolved into a highly efficient, automated process dominated by HF's and highly capitalized private prop groups. I personally know groups here in Chicago that spend upwards of $50K per month ( and some much more ) in order to use RTS or Portware and to have the necessary ECN performance required to compete. You would also need to hold an exchange membership in order to get rates cheap enough to justify the considerable execution costs. Also, the returns seem to diminishing for intraday futures inter commodity arbitrage. What was 5 tics a decade ago is now 1 tic or a scratch. Tough place to be.

3. If you look at the exchange SPAN margin rates for holding spread positions overnight, they are ridiculously cheap. It is by far the cheapest futures leverage going. You could hold several different one-lot spread combinations in different spaces overnight for only a few thousand dollars of initial margin. Obviously, some high volatility spreads like the metals or Energy Cracks require considerably more margin. I believe in and indeed encourage my clients to swing or position trade futures spreads - especially for retail types or modestly capitalized traders.

4. I am not aware of any reasonably priced, commonly available search tool that will select the "best" futures spread combinations for you in terms of a spread's product construction ( what products and expiries to choose) and a good entry signal that holds up over time. There is a level of tradecraft and modeling knowledge required to do this consistently. Just taking spread positions for "mean reversion" ( the traditional, "good 'ole days" approach ) can be very painful.

5. Use the exchange supported spreads whenever and wherever possible. They are truly one of the most significant and revolutionary product developments of the past decade. Even IB now has these on their trading platform. You do not require automation or manually legging skills to execute even more complicated strategies with multiple legs. The slippage risk is virtually eliminated, and any order type that a singular product supports ( limit, market, OCO, FOK, etc. ) is also applicable to the exchange supported spread. You will see a singular price ladder of bids and offers for a Natural Gas Condor or a Soybean Crush spread, for example.
 
Bone:

Thank you for all the information. Much of what I know about spreading has come from reading various posts of yours throughout these forums.

Would you say that it may be worthwhile to special in trading a specific curve? For example, I have read that there are spread traders that trade only the Eurodollar curve or only the Treasury curves that can make very consistent money every month. Is there another "curve" that offers great opportunities like this? What is the best way to learn about trading them?

Thank your for the contribution
 
Fedmayne said:
Bone:

Thank you for all the information. Much of what I know about spreading has come from reading various posts of yours throughout these forums.

Would you say that it may be worthwhile to special in trading a specific curve? For example, I have read that there are spread traders that trade only the Eurodollar curve or only the Treasury curves that can make very consistent money every month. Is there another "curve" that offers great opportunities like this? What is the best way to learn about trading them?

Thank your for the contribution
More...

I think specialization is imposed due to familiarity, success, and limits imposed by trading firms with a number of traders in the same product space or by floor traders who were physically limited to where they could situate themselves on the trading floor. They were several Treasury pits at the CBOT, and likewise there were many different product areas in the Eurodollar complex. As a floor trader, you really didn't want to move around once you were established because of access to broker order flow and broker acceptance of your ability to take a trade and not hang them and their client in the process. A trader's floor position was sometimes established with physical violence.

Electronic trading changes this entire dynamic. I encourage my clients NOT to specialize in that I would rather they not suffer inevitable ups and downs and the ebb and flow of opportunities of having such a narrowed focus.

After about four months my typical client will have several hundred spreads in every available electronic exchange and product space. My preference is to be a selective cherry picker amongst a huge population of possibilities.

So, you could say that my belief is that careful selection over a large population trumps specialization over a small population.
 
You can get a free thinkorswim simulation account and u can actually create spreads. Only problem is they dont have every futures contract out there but its a good start. You have to learn how to create multipliers from whatever ratio you are using. The spread multiplier is a reflection of the spread ratio. For example if you want to trade cl vs heating oil its 42*ho-1*cl. That is not actually 42 ho contracts but rather 1 contract vs 1 cl contract. Its that way becausenyou have to compensate for the difference in tick values for each contract. Hope that helps
 
Bone:

I totally understand your points and I do think they make a lot of sense. Before I looked into futures I traded spot FX. The more I learned about trading the more I realized this was in some way just not very authentic (not really trading a true market). What I do remember though is that there was a huge amount of currency pairs to choose from so you had different opportunities no matter where you looked. At one point I looked at the AUD/NZD chart and wondered why it was back and forth all the time and in the long run, trended incredibly smooth. After I learned about spreading in futures I was able to answer this question for myself. I have a fairly good understanding of how the execution of a spread works but where I really am lost is how to figure out how much margin I actually need to hold something overnight.

I have a small account with Infinity Futures where I have access to a the basic markets and DOMs for execution. The problem is there is no exchange supported spreads available through them and the Sierra Chart package I have. Additionally, it is difficult to have certain questions answered in a confident tone. I know that for intraday I have to put up 500 for an Emini SP contract. I know that there is a reduction in overnight margin if I am also short on a related contract at the close. I have looked at the CME website for margin requirements but don't really understand how to read them.

http://www.cmegroup.com/trading/equ...8UQuPyLjClSt4eM_HXmyVP939yVGELG0awmI9c1zw_wcB

At this link I can see that the maintenance margin ( I assume this is the overnight margin) is reduced to only 50. Do this mean that I need an Emini SP to be side A and side B ____________?

rolando,

I have the ability make a spread chart through Sierra Chart for different contracts but am unsure as to how the multiplier function works. I know that if I were to spread CL against HO that CL is $10 per point and that HO is $4.20 per point. I know that I need to use the multiplier for something but I'm not sure how exactly.

Thanks
 
Just to add to the discussion:

If you want to watch charts of exchange supported spreads with OHLC datas and volume, not charts of difference between legs settlements from software like scarrtrading or seasonalgo, download a free version of barchart trader. It's only daily datas though.
 
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