Trading the S&P/DJIA spread

Why are you calculating the spread as :

(ES *9.5) - Dow

(I think you just divide the DOW value by the ES value)

Have you ever thought of using volatility and point value into the calculation ?
 
I do it this way because I have a program that calculates DJIA "fair value" using the S&P as a guide, and it's just easier for me to decipher this way, but certainly pairs are often tracked in the manner you suggest.

I use 9.5 for the S&P simply because that is YM divided by ES at this time.

How do you put those other factors into the equation?
 
Point Value is very easy.

ES * 50 = ES value (900 * 50 = 45000)
YM * 5 = YM value (8450 * 5 = 42250)

You now now the value of each product. According to this you should buy 1 and sell 1. (They are approx equal)
If you look at the average daily range (volatility) you can also calculate an "ideal" spread

I use special software which calculates the ideal spread. Unforuntely this can only be done on EOD but during the day nothing will happen that changes the spread dramaticly.
 
sometimes with success ... but I prefer to do it outside

of 930 am - 4 pm when it is easier for me to see

if things are out of line
 
I found watching the spreads interday helps to get the feel for how they move.www.livecharts com has delayed charts available .
(es03h*50) - (ym03h*5) is the symbol you need too use.or your own formula.be sure too have a space between each part pf the formula ie (space es03h space * space 5 space) ect.hope this helps
 
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