Spread Trading

W

wavetrader

I'm starting this thread with my initial question and an answer I got from a private post.

We'd like to open the discussion to other traders as this may benefit a lot of us, and we can learn a lot from each other on the benefits of spread trading.

So, to start it off:

wavetrader wrote on 04-28-03 04:21 PM:

Hi Markus,

I read about your posts on spread trading. I too am a bond trader, looking to add spread trading to my trading arsenal. My daily profit on the bonds are smaller than what I had expected them to be when I was still testing my system, and stumbled on the idea of trading spreads on Joe Ross' website.

Do you do the spread on a 1:1 ratio? If long the spread, that would be Long 1 T-Note/Short 1 T-Bond; If short the spread, that would be Short 1 T-Note/Long 1 T-Bond. Is that correct? Would it still be profitable doing it this way? I heard of other people mentioning that you need to put the spread on the proper ratio, which is calculated using the DV01. I'm not quite sure what this means.

Also, which broker do you use for trading the NOB spread?

How has your profit curve improved after switching exclusively to spread trading?

Thanks so much for your insight.

Dear wavetrader,

1. Yes, I trade the spread on a 1:1 ratio. I have no idea how to trade it using the DV01. Never heard about that.

2. I would not recommend to start spread trading with the NOB: The NOB is volatile, not nicely trending and requires a lot of margin. I would start with Intramarket-Spreads (e.g. C-C, W-W, KW-KW, etc.). These spreads require between $100 and $400 margin per contract and easily make this amount in 2-5 days. Trading these spreads you will make 100% or more on your margin, without risking a lot. More later...

3. My profit curve changed dramatically after I started to trade spreads: Before trading spreads I managed my account down to $3,500. Then I started spread trading and grew my account to $18,000 within 3 months. :-))

Talk to you soon,

Markus
More...
More...
 
Markus,

Can you give more details on the spreads you suggested:

C/C, W/W, KW/KW

What do these stand for? Which broker do you use for spread trading? Can this be done on IB? What other indicators do you use, if any, for spread charting?

I've just started to chart the NOB spread, and I've attached a chart from 2 days ago. I've added Bollinger Bands, RSI and CCI, as they make it easier to read overbought/oversold entry/exit signals on the spread.Based on this chart, the NOB spread is narrowing down. Going back to the leftmost part of the chart, it would have been good to short the spread after a bearish divergence (red line) was printed on 04/07. This would have yielded approx. $1,690/contract. Looking forward, I wouldn't be entering just yet, but maybe I'll wait to enter a long spread once it goes down below 1.0, and even better if it tags the lower BB as it hits the RSI oversold zone and a divergence appears.

What do you think? Does this chart mirror what you see on your NOB spread chart? Please let me know if I'm way off base here too. I am here to learn. Hopefully others will pick up something from this too.

thanks,
wavetrader
 

Attachments

Wavetrader,

there are 3 different kinds of spreads:

Intramarket Spreads

Officially, Intramarket spreads are created only as calendar spreads. You are long and short futures in the same market, but in different months. An example of an Intramarket spread is that you are Long July Corn and simultaneously Short December Corn.

Intermarket Spreads

An Intermarket spread can be accomplished by going long futures in one market, and short futures of the same month in another market. For example: Short May Wheat and Long May Soybeans.

Intermarket spreads can become calendar spreads by using long and short futures in different markets and in different months.

Inter-Exchange Spreads

A less commonly known method of creating spreads is via the use of contracts in similar markets, but on different exchanges. These spreads can be calendar spreads using different months, or they can be spreads in which the same month is used. Although the markets are similar, because the contracts occur on different exchanges they are able to be spread. An example of an Inter-exchange calendar spread would be simultaneously Long July Chicago Board of Trade (CBOT) Wheat, and Short an equal amount of May Kansas City Board of Trade (KCBOT) Wheat. An example of using the same month might be Long December CBOT Wheat and Short December KCBOT Wheat.

(source: http://www.tradingeducators.com)

Usually Intramarket spreads carry the least risk, while Inter-exchange spreads carry the highest risk.

Based on my experience I would start spread trading with intramarket spreads. That's why I suggested to start with e.g. a Soybean-Intramarket spread like SN3-SX3 (see attached chart).

The margin for this spread is just $473 per contract, and you see a nice move of 20 points during April. Each point is $50, and you don't have to use sophisticated systems or indicators to catch such a move. This move made $1,000 per contract, i.e. more than 200% based on your initial margin.

Spread trading is different from outright futures trading, and I would not start with a volatile Spread like the NOB to learn it. But maybe that's just my opinion...

Here are some more symbols and spread margins:
http://www.tradingeducators.com/resources/spread_margins.htm

(Un)fortunately you can not trade these kind of spreads through IB, because these are outcry markets. You need a futures broker. I will e-mail you the contact information of the broker I am using.

Does that help?

Markus
 

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Many thanks to wavetrader and Markus for starting this thread and posting very useful and clear explanations of the basic concepts in spread trading.

Even though I have been interested in the subject of spread trading, many of the concepts were not very clear to me and the books on this subject are expensive and few in number, and their quality and utility to a aspiring spread trader largely unknown. Added to this series of "barriers" is the lack of reliable and impartial information on quality and dependability of commodities brokers and their services.

I hope to learn from this discussion enough to try a few spread trades.

Questions suggestions for Markus:

1) Which book helped you most in learning the practical aspects of spread trading?

2) Would you be kind enough to post a list of resources (books, web sites, info on brokers etc) that may be helpful to beginners? -- in addition to the links you have already posted.

3) What do you think of Joe Ross' book on spread trading?


4) What kind of charting service / software and technical analysis is required for following a spread trade?

4) A list of DOs and Don'ts for beginners

5) Illustrative charts of some of your trades that may be of educational values to beginner like me

If I come across useful information on the subject of spread trading I will certainly add them to this thread so that the collective knowledge and experience of all those who contribute to this discussion may be of use to other traders in the future.

Thanks once again to both of you for your contributions.

Rama.
 
The NOB spread is the bomb!

The NOB spread is a volatile spread that must be monitored constantly. The beauty of the NOB spread is that it can start out as a daytrade and if it flows in a profitable direction it can wind up being a very handsome position trade.

Remember the trading adage, "cut your losses and let your winners ride". Well the NOB spread has trendy-ness than can possible take the trader on a nice profitable ride over days, weeks or months.
 
Calendar spreads are the easiest to trade. Old crop new crop spreads can be a little more volatile. Spreads in two different commodities or two different markets or two different countries are often the most volatile.

Calendar spreads have the highest profit relative to margin. When you catch a seasonal trend, expect to earn your margin in about six weeks. You should start by trading these. There are certain times of the year when markets adjust. Producers and end users are willing to pay a premium for increased liquidity. We pocket these premiums as profits.

Calendar and other spreads are discussed on a new post in Strategy Trading

It is missleading to put seasonals in with day trading and short-term investing. If I had not used search, I never would have found it in there.

The way to trade seasonal spreads is as a position trader. Spreads that we hold now, and have held for some time will most likely be held until 7/11.

Its not day-trading and for sure Speculation is not investing.

Seasonal Spread trading is more in the area of formula writing, and strategy design.


-ooO-(GoldTrader)-Ooo-
 
Thanks for the excellent responses, Markus and Goldtrader. I'm looking forward to learning so much from you guys. I second the questions rrs456 has brought up.
It would be great to hear your answers to them.

Markus,
You mentioned the Soybean Intramarket or Calendar spread.

How do you know which months to pick in this type of spread? Do you go by volume in the contract months, or is there a guideline using seasonality and other factors? What is the best book to start with in learning spread trading? Something that shows the fundamentals, how to do your analysis, and actually shows you how to execute a spread trade.

I'm also looking forward to your recommendations for a broker for spread trading.


Goldtrader,
Can you post a link to the thread you started in Strategy Trading so people can just click on the link while they're in this thread?

Many thanks,
wavetrader
 


Spread Trading: multi-positioning trading strategie!

alohashirt4.jpg
 
Quote from rrs456:

Many thanks to wavetrader and Markus for starting this thread and posting very useful and clear explanations of the basic concepts in spread trading.

Even though I have been interested in the subject of spread trading, many of the concepts were not very clear to me and the books on this subject are expensive and few in number, and their quality and utility to a aspiring spread trader largely unknown. Added to this series of "barriers" is the lack of reliable and impartial information on quality and dependability of commodities brokers and their services.

I hope to learn from this discussion enough to try a few spread trades.
More...
GoldTrader already posted an excellent list of resources and Dos and don'ts in another threat:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=16982

There's not much to add, but here are my 2 cents:
Quote from rrs456:
Questions suggestions for Markus:

1) Which book helped you most in learning the practical aspects of spread trading?
More...
I read only 3 books about spread trading:
  • Joe Ross: Trading Spreads and Seasonals. (This was the first book I read about spread trading. I think it was Nov 2001.)
  • Bob McGovern: Spreader's Handbook
  • Courtney Smith: Futures Spread Trading: A Complete Guide
I consider Joe Ross' book the most valuable for learning practical aspects of spread trading. On Joe's website you can download the TOC and the first 2 chapters of this book (14 pages):
http://www.tradingeducators.com/books/books_futures.htm#SPREADS (click on Preview).

The TOC of Courtney Smith's book is published on the following website:
http://books.global-investor.com/books/15423.htm

2) Would you be kind enough to post a list of resources (books, web sites, info on brokers etc) that may be helpful to beginners? -- in addition to the links you have already posted.
More...
http://www.mrci.com (Excellent research on seasonality of spreads)
http://www.spreaderx.com (Free Spread Trading Info and Forum)
http://www.futures-spread-trading.com


3) What do you think of Joe Ross' book on spread trading?
More...
I have nothing to add to GoldTrader's comments about the book (see http://www.elitetrader.com/vb/showthread.php?s=&threadid=16982)

If you order this book from Joe Ross' website, you can return it at any time:
"...we offer a no questions asked, money-back guarantee on every book still in saleable condition." (see http://www.tradingeducators.com/books.htm).


4) What kind of charting service / software and technical analysis is required for following a spread trade?
More...

I use FSxtra from FutureSource for my trading (http://platinum.fsxtra.com). It's rather cheap ($69.95 per month plus exchange fees) and offers everything I need.

Here is a website that offers FREE EOD spread charts:
http://www.britefutures.com/BFCharts/BFSpreadChart.asp

4) A list of DOs and Don'ts for beginners
More...

see GoldTrader's post: http://www.elitetrader.com/vb/showthread.php?s=&threadid=16982

Here are the 5 most important lessons I learned:
  • Don't trade illiquid months
  • If a spread does not move into your direction within 1 or 2 days, get out.
  • Take profits as long as they are there. Don't wait too long: Spreads can turn on a dime.
  • Don't be too greedy: 100% return on margin is an excellent result
  • Trade seasonal spreads; avoid contra-seasonal spreads
5) Illustrative charts of some of your trades that may be of educational values to beginner like me
More...

Coming soon...

Markus
 
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