total notional value difference to be as little as possible?
No. Technically, you want to 'risk adjust' each position, so that they are balanced.
A common industry measure of risk would be historical volatility (trailing volatility/rolling volatility/average volatility). So, you would 'dollar volatility adjust' the position sizing. This is called a 'hedge ratio' as well. There is the idea of balancing the positions to reduce the net volatility
optimally. This is called '
optimal hedge ratio' AFAIK.
So, here the
dollar value of the volatility is larger for an NQ future than it is for a YM future. This is why you take less exposure in NQ than YM.
It doesn't have to be perfect and you could even play with it a little. You can also combine mirco contracts to get a similar trade going. For example, you could buy 1 NQ and sell 1 YM and 5 MYM contracts. This would be the same trade but smaller risk.
And you do this so the chart reflects the notional value number and not the NQ/YM price number right?
Yes. I don't really ever divide the contracts. The dollar value of the notional spread is what you should use to estimate the risk of trading an index spread.
You can choose weightings that reduce your risk a lot. It's a very interesting way to trade, and the gains can be huge once you really start to learn how they are traded by the big money guys. I am experimenting with different ways to use them myself.
These are really cool techniques for taking hedged positions and really flexible too. You can mix the style with other techniques of trading when you get comfortable with them. Also, the spreads give a lot of information about how the institutions are feeling about the market.
