Properly "spreading" with real spreads.

[Overnight]

I have been reviewing a lot on the subject of spreads today on ET and have realized that while what I did was working, it was effectively just swing trading calendar spreads without stops and closing profitable legs. That is not proper spread trading, which is what I wish to accomplish.

When the crap slowly started hitting the fan in mid-December and I was down $10K over two weeks on the open legs I had confidence that the market would recover. But this time, two weeks ago, it all happened in two days and I could not handle the speed and heat of it. I think watching CNBC on that Monday and the speed at which the Dow crumbled to near-breaker levels did not help things at all.

Based on what I have read I have concluded a few things...

A) I do not mind swinging and with proper spreads the risk is minimized.

B) I like the idea of creating an innumerable number of spread combinations.

C) Ninjatrader is not the platform to use. They do not support exchange-traded spread futures, just outrights.

D) AMP with CQG data should work (my broker and feed). I need to get on the horn with them and get the skinny.

a) If it won't I would need to find a new broker. Bummer, I really like AMP.

E) I simply do not like daytrading technicals with tight stops.

So with all that in mind I need to download a new demo platform.

I am still trying to figure which platform I should start with. CQG IC, CQG Trader, CQG Qtrader, CQGM (I don't think so on that one since it seems watered down for mobile), CQG Spreader or eSignal. Some of these are free with AMP, some not.

I have MetaTrader5 enabled for live but it seems unwieldy.

And then we get to something like a 3:2:1 crack spread. All I have seen in general is that when the "parent" instrument moves, the "child" instruments move in tandem. CL goes up? So does HO and RB (or diesel). So setting proper ratios can be "delta neutral". (The only time I noticed the opposite so far in my limited observations was when hurricane Harvey hit and crude went down but gas went up (very short-term.) If you happened to be short crude and long HO/RB, that would have been a very nice win.)

So the idea here is to make profits on converging or diverging prices. But it all still seems the same to me as being able to choose a market direction. Assuming no slippage, how can one make money if you are delta neutral and flatten the spread? Is it just choosing the direction of the actual spread and long-term trading that chart with the same technicals as a daytrade chart, but with less chop?

From what I understand the momentum of the movement in spreads is much more consistent but slower. (Aside from reduced margins.) Do I have that part correct?

 

[Maverick74]

I have been reviewing a lot on the subject of spreads today on ET and have realized that while what I did was working, it was effectively just swing trading calendar spreads without stops and closing profitable legs. That is not proper spread trading, which is what I wish to accomplish.

When the crap slowly started hitting the fan in mid-December and I was down $10K over two weeks on the open legs I had confidence that the market would recover. But this time, two weeks ago, it all happened in two days and I could not handle the speed and heat of it. I think watching CNBC on that Monday and the speed at which the Dow crumbled to near-breaker levels did not help things at all.

Based on what I have read I have concluded a few things...

A) I do not mind swinging and with proper spreads the risk is minimized.

B) I like the idea of creating an innumerable number of spread combinations.

C) Ninjatrader is not the platform to use. They do not support exchange-traded spread futures, just outrights.

D) AMP with CQG data should work (my broker and feed). I need to get on the horn with them and get the skinny.

a) If it won't I would need to find a new broker. Bummer, I really like AMP.

E) I simply do not like daytrading technicals with tight stops.

So with all that in mind I need to download a new demo platform.

I am still trying to figure which platform I should start with. CQG IC, CQG Trader, CQG Qtrader, CQGM (I don't think so on that one since it seems watered down for mobile), CQG Spreader or eSignal. Some of these are free with AMP, some not.

I have MetaTrader5 enabled for live but it seems unwieldy.

And then we get to something like a 3:2:1 crack spread. All I have seen in general is that when the "parent" instrument moves, the "child" instruments move in tandem. CL goes up? So does HO and RB (or diesel). So setting proper ratios can be "delta neutral". (The only time I noticed the opposite so far in my limited observations was when hurricane Harvey hit and crude went down but gas went up (very short-term.) If you happened to be short crude and long HO/RB, that would have been a very nice win.)

So the idea here is to make profits on converging or diverging prices. But it all still seems the same to me as being able to choose a market direction. Assuming no slippage, how can one make money if you are delta neutral and flatten the spread? Is it just choosing the direction of the actual spread and long-term trading that chart with the same technicals as a daytrade chart, but with less chop?

From what I understand the momentum of the movement in spreads is much more consistent but slower. (Aside from reduced margins.) Do I have that part correct?

Overnight, what are you trying to do here? I am not familiar with what happened in your latest loss episode, you were trading spreads? In what markets? Spread trading is a very complicated subject but one I know well. I don't mind offering feedback and help but I'm confused what it is you want to trade and what exactly went wrong. Last year I knew you traded CL but gave up on that. Then you moved to indices. I suspect you just held long positions there. What spreads were you trading that caused some difficulty?

I cannot emphasize this enough, spread trading is not a one size fits all approach. Trading grain spreads is very different from energy spreads which is very different from interest rate spreads. Simply saying you want to trade spreads is like saying you simply want to trade something...anything. I'll try to point you in the right direction but more info is needed.

 

[kevinkdog]

I'm glad Maverick74 replied here, and I hope Bone does too. This should get very educational, very quickly... in fact, after one succinct reply, it already has...

 

[Overnight]

...What spreads were you trading that caused some difficulty?

I cannot emphasize this enough, spread trading is not a one size fits all approach. Trading grain spreads is very different from energy spreads which is very different from interest rate spreads. Simply saying you want to trade spreads is like saying you simply want to trade something...anything. I'll try to point you in the right direction but more info is needed.

(Pre-note: This is all legging in and out manually over long time-frames...)

Everything I have done has been haphazard in the approach. In CL I had been simply entering a long/short on the 2 nearer months, while attempting to read the previous cycling and what price range it had achieved and projecting that into the future, using input from fundamental events that could guide my price anticipation.

So I would close the profitable long leg if it was at the top of the cycle, or the profitable short at the bottom of the cycle.

Let's say at end of May I go July CL long, August CL short...

July CL long was in profit and at top of range over say 2 weeks (and August CL short was at a loss obviously), I would close the long and then re-enter with a short in July and a long in September. This would offset the 2 positions (July and September) with just one outright margin, August). If the range kept continuing down, I would close July short in profit and enter a new long in Oct and a short in Nov. This now gives 2 positions offset with full margin protection.

So I am currently sitting at Aug short, Sep long, Oct long, Nov short. So now I am net neutral with whatever current unrealized PnL there currently is, with realized P in the bank. It is at a point like this I would re-analyze the ranging, potential moves up or down and decide whether to close winning legs and let the losing legs recover for a bit, or close losing legs and let winning legs continue on.

If I felt the market was getting a bit out of range on either side I would then later on enter a Dec long or short depending on direction, which now gets me back to only one outright margin requirement. This was working up until March 2017 when I sensed the range was expanding too far beyond my ability to manage positions. So I tried to adapt this to equity indices, and I was biased long because equity markets had been on a nice ride up. So longing equities worked in that regard. A problem I encountered was the reduced number of months to "butterfly" or "condor" it or whatever, and then this correction added a new niggle on using time to allow a losing longing market to recover in the relatively short amount of time that can be had, which is 9-12 months.

Legging out short winners and trying to let long leg losers recover, or reversing a winning short leg on that same contract with a fresh long, thus having two or three contracts in the same direction (long) over 2-3 different contract months (This is basically averaging down losers) is NOT the way to do it in equities over a 6-12 month time-span in what appears to be a now-volatile market that could be the start of a bear. I can't take the chance that we will see a new 2008 crash where the dow fell what, 7000 points over a year and took 4 years to recover? It is like trying to predict an ultimate equity bottom in a restricted amount of time, which I am not able to do.

Rather than try to focus on a single direction, I guess I need to find a spread vehicle/style that can work in both directions. I like the seasonality and long-term cycling of physicals but need a way to contain that cycling into long-term profits with minimal loss, while being able to adjust for sudden events like a hurricane Harvey.

Sorry this is a bit long-winded (no pun intended) Maverick, but it an overview of my thought process.

P.S. Last March I also did a trial of the Reuters Eikon terminal and Genscape inventory reports to try to help me with anticipating future crude movement but did not have enough time to fully explore how that could help in energies.

 

[drm7]

If you are into seasonality, I would take a look at seasonalgo.com. It has a really slick platform that lets you analyze any spread combination of any commodity.

 

[Overnight]

If you are into seasonality, I would take a look at seasonalgo.com. It has a really slick platform that lets you analyze any spread combination of any commodity.

Yes, thanks. Someone else posted about that software in another thread, but I was trying to find something that worked with my broker/datafeed first. I do not know yet which to choose.

 

[rolando87]

Yes, thanks. Someone else posted about that software in another thread, but I was trying to find something that worked with my broker/datafeed first. I do not know yet which to choose.

I highly recommend TT Pro for trading spreads. Their built in charting is not as good as cqg's but it's not bad, just not as fast. TT pro starts at 400 bucks a month which is a good deal imo.

 

[Windlesham1]

A calendar trade ends when you close out one leg. Personally I don'tlike them as vega is a fickle mistress,and trading some months out really is a lottery. Naked shorts cost time,opportunity and margin. I post real trades for a UK website much to be learned even for me after 18 yrs trading.

 

[kellys]

So the idea here is to make profits on converging or diverging prices. But it all still seems the same to me as being able to choose a market direction. Assuming no slippage,
how can one make money if you are delta neutral and flatten the spread?
Is it just choosing the direction of the actual spread and long-term trading that chart with the same technicals as a daytrade chart, but with less chop?

@Overnight
It is best to find out what is driving a spread.

Are you using the same technique / methodology to trade all market spreads?
If so, then in my opinion, that is a problem.
For example, would you approach corn calendars like eurodollar calendars?

 

[Overnight]

@Overnight
It is best to find out what is driving a spread.

Are you using the same technique / methodology to trade all market spreads?
...

As mentioned above I wasn't properly trading spreads period, just legging in and out of positions manually.

If so, then in my opinion, that is a problem.
For example, would you approach corn calendars like eurodollar calendars?

Don't know anything about Eurodollars, and understanding why prices converge or diverge (as bone has pointed out many times) on energies softs and ags, well heck, any instrument spread, seems to be the essential key. For example I had been predicating my trading on anticipating that, for example, HO demand for the summer would drop lower, thus the price drops lower. So just buying a summer contract in the winter when demand is high would make logical sense and time might bear that out. But if some natural or man-made disaster happens in the spring then it would probably go up. How the price of that rising summer contract would interact with the following winter contract I don't know.