Spread Trading Strategies
- Thread starter bone
- Start date
Hey Bone, I appreciate your posts and they did get my interested in spread trading.
Am I correct though in that it seems a lot more complicated than directional trading?
I know if I pay you the 7k you will teach me, but how does one even contemplate spread trading. I know a bit about correlation and use it but I could never figure out how to construct these charts and what I would look for. What would be a realistic account minimum 25k less, more?
Am I correct though in that it seems a lot more complicated than directional trading?
I know if I pay you the 7k you will teach me, but how does one even contemplate spread trading. I know a bit about correlation and use it but I could never figure out how to construct these charts and what I would look for. What would be a realistic account minimum 25k less, more?
1. I do not personally think it is necessarily MORE complicated that directional trading, I do think it fair to say that you have many more choices and far greater flexibility in terms of what products you trade. If you have a good filtering system and entry study, then the idea is the be selective and look for what you think is the best risk versus reward scenario. The biggest difference is that you have a far greater number of possibilities to trade that directional flat price. With spreads, you can actually build your own markets. You can tune up or down volatility and trading range if you'd like. Very cool.
I mean, there is more to life than scalping ES or 6E or CL with a MACD or Williams %R or some other common technical indicator on a higher frequency timeframe. Besides, that gets boring and unreliable.
2. I have had alot of clients start trading with $25K accounts. What you have to remember is that one of the great advantages to spread trading is the margin offset benefits. Depending upon what products they are, you can carry several futures spreads overnight for just a few thousand dollars worth of margin. Most products on most futures exchanges get a 70 % or higher margin credit for the spread combination hedge. That's a big deal.
FWIW, please do not trade spreads based on seasonality alone. Also, there has been a common strategy perception over the years that spreads should be faded for mean reversion based upon historically modeled "rich-cheap" analysis ( for example, one or two sigma moves ). Both of those strategies I just mentioned held up for decades - but have been stunningly destructive for several years running now.
You can also go to the CME and Eurex websites and you will find some basic information about certain futures spread trading strategies in the education section.
My apologies may be in order because I have not read this thread. If this post is more appropriate elsewhere, please kindly advise.
Without using any software or metrics and just eye balling........... does a 10 year chart for a long term pairs trader willing to stay in the trade for many weeks to a few months have any usefulness at all. In other words, momentarily, disregard more significant short term modalities in the decision making of putting on a trade here.
The operative phrase here: "any use at all" for the prospect of shorting HOT and going long HST.
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3598678>
Without using any software or metrics and just eye balling........... does a 10 year chart for a long term pairs trader willing to stay in the trade for many weeks to a few months have any usefulness at all. In other words, momentarily, disregard more significant short term modalities in the decision making of putting on a trade here.
The operative phrase here: "any use at all" for the prospect of shorting HOT and going long HST.
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3598678>
If you are indeed short HOT and long HST on a weighted basis since the first of August - then yes, I very much like your near term prospects for the trade.
You are certainly welcome to trade any way you choose - but IMO I would think that you would be much better off making decisions based upon the spread differential between the products that comprise the pair. It appears in your chart that you are tracking each component name individually. You have not mentioned if you are weighting your pair to be dollar or volatility-neutral ( as much as practical ). And since you are attempting to be a true relative value trader, you will want to engineer out as much delta directionality as practical by weighting each component's share price. You basically want your long share value to equal your short sale value.
Thank you Bone.
I am dollar neutral comparing the Short leg with the Long leg.
I suspect with the following, you are just using other terms for the name of the stocks:
(1) "products that comprise the pair;"
(2) "tracking each component name individually"
Although I have observed in other posts "weighting the pair to be volatility-neutral," I don't know why to do that, and would not know how to do that. Is it not volatility that in large measure created the digression from the mean ? Is it not volatility that will have the pair in large measure revert to the mean ?
btw... all my charts today (simple stock plots of varying periods) indicated only half the potential had been realized, one of them (the 6-month) said ALL potential had been realized. Being conservative, I bailed on half the position mid-session.
Again, thank you for examining and responding with your judgement to stay with the trade. I am not sure your reason for that call, but then maybe with you not knowing how I weighted the pair was a reason for not being too specific as to why you made that call. At this point, I assume you believed in the Head & Shoulders of the 10 year chart--that it indeed carried some significance. By the way, many of the different stock charts, each with their own time period, had the H & S, but not necessarily as well configured.
I am dollar neutral comparing the Short leg with the Long leg.
I suspect with the following, you are just using other terms for the name of the stocks:
(1) "products that comprise the pair;"
(2) "tracking each component name individually"
Although I have observed in other posts "weighting the pair to be volatility-neutral," I don't know why to do that, and would not know how to do that. Is it not volatility that in large measure created the digression from the mean ? Is it not volatility that will have the pair in large measure revert to the mean ?
btw... all my charts today (simple stock plots of varying periods) indicated only half the potential had been realized, one of them (the 6-month) said ALL potential had been realized. Being conservative, I bailed on half the position mid-session.
Again, thank you for examining and responding with your judgement to stay with the trade. I am not sure your reason for that call, but then maybe with you not knowing how I weighted the pair was a reason for not being too specific as to why you made that call. At this point, I assume you believed in the Head & Shoulders of the 10 year chart--that it indeed carried some significance. By the way, many of the different stock charts, each with their own time period, had the H & S, but not necessarily as well configured.