Inter-index intraday spread trading

OP is on the right track for spreading, but wrong symbols. ES and YM are too closely correlated. Instead work on spreading the ER and ES paired. They are only semi-correlated... move together when entire market is trading up or down, but diverge when sector rotation or Dow - NDX bifurcate.

From there you need to study correlation to know whether 1 ER = 2 ES contracts is the right ratio. Also, being able to predict directional bias makes the difference. Trading ER in harmony with "trend" and ES opposite "trend" is what gives you the widened gaps in spread where profits are.

ER is trendier while ES is more sideways. If you trade ER with trend and ES against trend, there will be plenty of moments where the spread widens. Big arbs cannot kill this one quickly, because ER is too small per futures and ishares for large size plays.

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Emini spreading works fine. Match up your $$ values between semi-correlated contracts... ES and ER, ES and NQ, YM and NQ. Trade the ES against trend, NQ or ER with trend, capture spreads when ES backs & fills.

No easy money here, double the trade costs but no need for stops. You cannot blow up an account spreading eminis unless one symbol halts trading for some inane reason. With all eminis now on globex, that scenario shouldn't happen. Generally speaking, you should have greater staying power in the trade than straight plays with protective stops.
 
Quote from austinp:

OP is on the right track for spreading, but wrong symbols. ES and YM are too closely correlated. Instead work on spreading the ER and ES paired. They are only semi-correlated... move together when entire market is trading up or down, but diverge when sector rotation or Dow - NDX bifurcate.

From there you need to study correlation to know whether 1 ER = 2 ES contracts is the right ratio. Also, being able to predict directional bias makes the difference. Trading ER in harmony with "trend" and ES opposite "trend" is what gives you the widened gaps in spread where profits are.

ER is trendier while ES is more sideways. If you trade ER with trend and ES against trend, there will be plenty of moments where the spread widens. Big arbs cannot kill this one quickly, because ER is too small per futures and ishares for large size plays.

*

Emini spreading works fine. Match up your $$ values between semi-correlated contracts... ES and ER, ES and NQ, YM and NQ. Trade the ES against trend, NQ or ER with trend, capture spreads when ES backs & fills.

No easy money here, double the trade costs but no need for stops. You cannot blow up an account spreading eminis unless one symbol halts trading for some inane reason. With all eminis now on globex, that scenario shouldn't happen. Generally speaking, you should have greater staying power in the trade than straight plays with protective stops.
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Exactly. Trading this way lets me be in the market and do my day job, too, without worrying about every twitch the market makes.
There may be greater potential with NQ vs. ES and some others -- I will look into it. I latched onto ES vs. Ym, because the value of the contracts is close for one lot of each. I am just beginning and don't mind small profits (less risk) to start.
 
<i>"Exactly. Trading this way lets me be in the market and do my day job, too, without worrying about every twitch the market makes. There may be greater potential with NQ vs. ES and some others -- I will look into it. I latched onto ES vs. Ym, because the value of the contracts is close for one lot of each. I am just beginning."</i>

Money is made spreading in two ways: arbing the slight variances between two correlated markets, or hedging the general flow of two semi-correlated markets.

ES and YM generally move in tandem... closest of all emini pairs. The ES/YM and ER diverge the most. That is what retail traders seek. We cannot effectively arb the correlated pairs.

If short 1 ER / long 1 ES in a falling market, the ER will drop -3pts and ES will drop -4pts. That makes the short ER worth +$300 and long ES worth -$200 per contract. The spread is your profit. Sometimes it will widen, sometimes it will narrow or close.

Theoretically you could let the pairs run until such time that spread goes from negative to positive and close out then. That's the theory... research will show what reality is :)
 
Quote from austinp:

<i>"Exactly. Trading this way lets me be in the market and do my day job, too, without worrying about every twitch the market makes. There may be greater potential with NQ vs. ES and some others -- I will look into it. I latched onto ES vs. Ym, because the value of the contracts is close for one lot of each. I am just beginning."</i>

Money is made spreading in two ways: arbing the slight variances between two correlated markets, or hedging the general flow of two semi-correlated markets.

ES and YM generally move in tandem... closest of all emini pairs. The ES/YM and ER diverge the most. That is what retail traders seek. We cannot effectively arb the correlated pairs.

If short 1 ER / long 1 ES in a falling market, the ER will drop -3pts and ES will drop -4pts. That makes the short ER worth +$300 and long ES worth -$200 per contract. The spread is your profit. Sometimes it will widen, sometimes it will narrow or close.

Theoretically you could let the pairs run until such time that spread goes from negative to positive and close out then. That's the theory... research will show what reality is :)
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OK. I'll look into ES vs. YM, knowing that winning more trades than I lose depends on getting the direction of the spread right. I am not worried about losing on a trade, because of the correlation. It's hedged, however imperfectly -- if not for the imperfection of the hedge it wouldn't be possible to make money. If YM vs. ES doesn't make money, I'll try the more exotic pairs.

I wonder if the correlation is due to inter-index arbitrage? That's what I suspect.
 
The Dow components are basket-traded against SPX plays for hedges & spreads... that is why they track so closely, you are correct.

The S&P versus NDX or RUT is only semi-correlated.

You will not make money spreading the ES/YM pair. They do not diverge enough to offer profits. Think of it this way... you need them to undulate, to diverge from each other now & then in order to offer profit opportunities.

There is nil divergence between ES and YM. Going long one / short other will not widen any spread. Going long or short both will only give you 2x leverage directionally... it is not a spread.

If you take this any further, begin with ES and ER paired. ES and YM paired = spread is a total waste of time... wrong rabbit trail. You cannot make a spread from the same exact market, which in essence ES/YM are. Scratch that from your thought process.

There is no scenario where you can go broke in a spread pair unless one side ceases to trade while the other doesn't. Other than that, the inherent spread cannot widen to killer distance. Ideally it will widen & narrow... allowing you to exit at the favorable width part.
 
Quote from austinp:


You will not make money spreading the ES/YM pair. They do not diverge enough to offer profits. Think of it this way... you need them to undulate, to diverge from each other now & then in order to offer profit opportunities.
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I see a profitable spread between SPX and INDU. I'll have to check whether the opportunity exists between ES and YM. I cannot afford to trade the baskets, so if there is no spread betwen ES and YM I won't be able to profit from the spread between SPX and INDU. Good point. I will add ES and YM to my data collection, and will need to dig through that data.

Another spread candidate is OEX vs. MID -- S&P 100 vs s&p 400. I remember last summer the s&p labored with difficulty to get to 1500 or so and was carried up by the 400 midcaps. There is a MID futures contract -- don't know about OEX.
 
Doli, I watch the Nas, S&P, and Dow as I trade...but I don't trade an arb methodology.

What i've found (read, and verified myself over the last year and a half), is that intraday, if there is a large enough spread between the DJX and the S&P, the DJX will eventually turn to follow the S&P. Once this occurs, you will find the market will pull whatever way the S&P was leading.

For example, say the Dow is up 1% by noon (EST), but the S&P is barely up 0.3% at the same time. Unless this seperation has occurred due to a dramatic news incident, then the dow WILL drop, and and the S&P will as well.

The dow won't just fall back to a 0.3% place with the S&P...the fall in the DJX will kick off a negative move in the S&P as well...causing both markets to fall a bit.

Usually this lasts 10 min to an hour...not an all day event...but it's fascinating to watch...and profit from.

As for the Nasdaq...when trading such setup, I like to see the Nas and the S&P trade together pretty tight, but the DJX show a divergence from the other two. Then, I wait for the break (up or down, depending on the divergence), and hop on for the ride.

Doesn't set up often (2-5 times a month?), because the spreads between the two need to be quite large...I wish I could define "large"...more of a subjective measure, but watch when the DJX gets away from the other two markets...if the S&P and NAS look strong, and the dow weak, the market has some hidden strength that will bust out.

If things are weak, but the down strong...the market is going to be "correcting"

I've found this to be one of my very best setups to trade, in terms of the markets response to this situation (over 90% success rate, and in the ES, good for 2-6+ points each time)

Just wish it happened more often! lol

I will try to post a chart...or at least an example of a good day to see this concept in action.

Greg
 
One more thing...I also trade off these 3 alone when there is a divergence in intraday highs and lows.

If the DJX makes a new intraday high, but the S&P and NAS don't...im looking to go short. If the DJX makes a new low, but the S&P and NAS don't....i'm looking to go long.

Look at a 5 min chart of Jan 14th. You'll see at 10:45 and 10:55, the DJX makes new intraday highs. However, the NAS and S&P don't. The market then sells off for 20 min, moving 3.75 points in the S&P from high to low, before it starts to head up again.

index divergence is good for more than just arb setups...it's actually a pretty good indicator of future market movement.
 
Ok...I don't know how to post a chart (kinda computer illiterate), but I can give you the divergent setup.

if you look at Feb 6th...around 11:55 am, the DJX is up a few points from it's close the previous day.

However, the S&P around the same time is down 1-3 points...and the NAS is down nearly a full percent!

And, predictably, the market falls apart from noon until close....it was a complete fall, without so much as the typical 12:30-12:45 reversal.

This happens over and over again...has been doing it for years. Again, I just wish it was more frequent!
 
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