The ACD Method

[RCG Trader]

Quote from Maverick74:

Going forward, I want to spend more time going over spread markets. Using ACD to locate and execute spread trades with solid edge. Nominal price alone has always been a terrible way to evaluate a given market. Everything must be evaluated relative to something else.

I'm going to give a simple example here. Being long the SPY against a short XLF, the financial ETF. While many are trying to top pick or bottom pick the market, the irony here is that both sides can put on this spread and express two completely different points of view while making the same money. There is two ways to look at this spread. One could say he is expressing his view that the market is going higher led by the large cap stocks. And she can be expressing her view that the market is going lower led by financials. Both have the same trade on, both sitting at or near the high of the year. This is how you find edge. Not by getting short SPY because you think the market is going to zero or getting long SPY because it's a new bull market.

I think this would be a good lesson, I know next to nothing about spread trading, and it sounds like a good way to further limit risk.

 

[RCG Trader]

It looks like the money boys are not thrilled about Spain's new government. Seems like they are buying dollars right now.

 

[Maverick74]

Quote from Shanb:

Ok nice...now we are getting to some good stuff! Just to clarify you are not looking for strict mean reversion here...more of the a trend trade of the spread?


So how would you address the position sizing in this scenario. Equal dollar weight, or a vol based measure? Exits based off the price action at the A levels of the individual components or wait for the spread to get to widen to some level?

For now the spreads will be dollar neutral. We want to be long volatility on the numerator on long spreads and vice versa. The idea here is to capture and isolate confirmed A trades that we expect to have follow through with less volatility then the outright. These spreads will be driven by price action. In other words, once the leading edge of the spread changes it behavior, to exit the spread. And correct, we most certainly are NOT trading mean reversion. We are looking for trends.

 

[Maverick74]

Quote from RCG Trader:

It looks like the money boys are not thrilled about Spain's new government. Seems like they are buying dollars right now.

Dollar index is down right now RCG, not up. Terrible price action in the dollar right now relative to the ES.

 

[Maverick74]

Quote from Maverick74:

Dollar index is down right now RCG, not up. Terrible price action in the dollar right now relative to the ES.

US Dollar failed at the monthly A up last week and is currently sitting at the QTR A down.

 

[RCG Trader]

Quote from Maverick74:

US Dollar failed at the monthly A up last week and is currently sitting at the QTR A down.

My time frame is shorter than yours. You swing trade, I daytrade. However, the post you make do factor into whether I will step on the gas or ride the brake.

 

[Maverick74]

Quote from RCG Trader:

My time frame is shorter than yours. You swing trade, I daytrade. However, the post you make do factor into whether I will step on the gas or ride the brake.

I watch all time frames. US Dollar opened lower TONIGHT. Now that in isolation tells me nothing. What does tell me something is that ES opened down 10 handles and the US Dollar did not even try to come off. Sitting around unched. That gives me a lot of information. That's how I read price action.

 

[RCG Trader]

Quote from Maverick74:

For now the spreads will be dollar neutral. We want to be long volatility on the numerator on long spreads and vice versa. The idea here is to capture and isolate confirmed A trades that we expect to have follow through with less volatility then the outright. These spreads will be driven by price action. In other words, once the leading edge of the spread changes it behavior, to exit the spread. And correct, we most certainly are NOT trading mean reversion. We are looking for trends.

Do your traders do this in your office? Kinda impressed that you are providing a high level of training here at ET for free, haven't seen that since dbphoenix and acracy were running around here.

 

[Maverick74]

Quote from RCG Trader:

Do your traders do this in your office? Kinda impressed that you are providing a high level of training here at ET for free, haven't seen that since dbphoenix and acracy were running around here.

I like to write. Not very good at romance novels so I write about trading. But you make an interesting point RCG. Maybe I should post less.

 

[Shanb]

Quote from Maverick74:

I like to write. Not very good at romance novels so I write about trading. But you make an interesting point RCG. Maybe I should post less.

This thread is hidden to the ET world. In the TA section with an unassuming title ACD or ABC..something like that lol

You can keep positng John, we are troll free here!