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Outright or Spreads?
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Outright or Spreads?

  #11 (permalink)
Trading Apprentice
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Hi Guys.

Does anyone know how Bill Traders trade the spread in Propshops?

There is a total lack of information out on the internet.

I was talking to a friend and he said Bill Traders make trades on the spread based on changes to the yield curve?

For instance i read this from a webstie:

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If the 2-year is yielding 0.86% and the 30-year is yielding 4.50%- a spread of 3.64%. This may lead a trader to feel that the 30-year was cheap, relative to the 2-year. If that trader expected the yield curve would flatten, he could simultaneously go long (buy) the 30-year and sell short the 2-year. Why would the trader execute two simultaneous trades rather than simply buying the 30-year or selling short the 2-year? Because if the yield curve flattens, reducing the spread between the 2-year and the 30-year, it could be the result of the price of the 2-year falling (increasing the yield), or the price of the 30-year increasing (decreasing the yield), or a combination of the two. For the trader to profit from just going long the 30-year, they would be betting that the flattening of the curve will be the result of the price of the 30-year going up. Similarly, if the short the 2-year they are betting that the price of the 2-year will decline. If they take both positions, they do not have to know in what way interest rates will move in order to make a profit. Such trades are “market neutral” in the sense that they are not dependent on the market going up or down in order to make a profit.

I've never seen a yield curve charted on a program before and cant seem to do it on Ninja Trader, but do Bill Traders in Propshops really day trade like this?

There's seriously a lack of information on the internet about these Bill Traders. My friend said his friend that works at Propex said theres bill traders there making $100,000 a month consistently. So they must be doing something right. If i knew roughly what they are doing i can put the work in. But as of now I am totally lost.

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  #12 (permalink)
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joeyk View Post
Can you tell me a little more about number 2. You said " scalping orderflow in treasuries/iner commodity (much more complex) - learn about modified duration, yield curve etc"

Does this mean if they are looking at order flow and the yield curve and then making trades to scalp the spread for 2-5 ticks?

Im good at reading the order book and since i have started to look into spreads I have seen this happen: In 6-10 tick rallies ZB (30 year Bond) might move 10 ticks but the ZN (10 year T-Note) might move only 6 ticks so you can take the difference for a 4 tick profit. Generally this happens when the market has been ranged bound for hours and there's a lot of puking traders getting out of losing trades while new money is coming in. This analysis is purely order flow though. So are you saying NOB spreaders would be looking at the yield curve too?

Someone might say this in the above scenario: If you feel its going to rally down 6 -10 ticks why would you spread trade it, why not just take an outright trade? Judging by my current knowledge of spreads this is why. If you take it as an outright trade you are likely to get chopped up, it might move against you 2-3 ticks before it rallies. So you might take too much heat and exit the trade before it rallies. Then you might trade it again because you think its about to rally then it does so you take another loss. Then when it finally rallies you've taken so much heat that you don't trade it and you miss the rally. Am i right in saying if i spread trade the rally and sell the 30 year and buy the 10 year Tnote that I can out last the market moving back and forth and not take so much heat and be able to wait it out until the market rallies and have my trades filled already?

Soz if none of this makes sense im new to spreads.

In fairness, I'm probably not the best person to answer as I dont day trade spreads. Although you wouldnt be using a chart to trade these per say, it may be an idea to build a tick chart of the spread if you have a good quote terminal (Ensign, CQG etc) that allows you to do so. You'll get an idea of the smoothness of the action from there.

The benefits arent necessarily that it's 'easier' in that the volatility isnt as fierce. It isnt (for me). The benefits are the reduced margin for correct ratio spreads. That means you can trade more spreads with the same money - which should make up for the reduced vol on a risk adjusted return basis.

The other big benefit is that if you are day trading spreads (or any other structure), you have more legs to play with to manage risk. You may decide there's an edge in legging in or out of the spread at times especially as you may only be making 1-2 ticks on a lot of trades.

As for learning about modified duration and yield curves, this is more for getting a longer term opinion about the spread, and the all important ratios - your prop firm will have these for you via bloomberg or something. As theres less volatility, the daily direction will have more pull than trading outrights.

Really though - if you are good at outrights, I wouldnt bother with spreads just because the firm asks you too - unless they are funding you 100%. Otherwise, there are plenty of arcades/prop firms around the world that allow remote traders and will 'sell you leverage' to trade bigger outright size if you want to - bigger than a retail broker will allow you.

I trade for the freedom, not to work for someone else - so maybe Im biased against prop firms???

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  #13 (permalink)
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joeyk View Post
Hi Guys.

Does anyone know how Bill Traders trade the spread in Propshops?

There is a total lack of information out on the internet.

I was talking to a friend and he said Bill Traders make trades on the spread based on changes to the yield curve?

For instance i read this from a webstie:

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


If the 2-year is yielding 0.86% and the 30-year is yielding 4.50%- a spread of 3.64%. This may lead a trader to feel that the 30-year was cheap, relative to the 2-year. If that trader expected the yield curve would flatten, he could simultaneously go long (buy) the 30-year and sell short the 2-year. Why would the trader execute two simultaneous trades rather than simply buying the 30-year or selling short the 2-year? Because if the yield curve flattens, reducing the spread between the 2-year and the 30-year, it could be the result of the price of the 2-year falling (increasing the yield), or the price of the 30-year increasing (decreasing the yield), or a combination of the two. For the trader to profit from just going long the 30-year, they would be betting that the flattening of the curve will be the result of the price of the 30-year going up. Similarly, if the short the 2-year they are betting that the price of the 2-year will decline. If they take both positions, they do not have to know in what way interest rates will move in order to make a profit. Such trades are “market neutral” in the sense that they are not dependent on the market going up or down in order to make a profit.

I've never seen a yield curve charted on a program before and cant seem to do it on Ninja Trader, but do Bill Traders in Propshops really day trade like this?

There's seriously a lack of information on the internet about these Bill Traders. My friend said his friend that works at Propex said theres bill traders there making $100,000 a month consistently. So they must be doing something right. If i knew roughly what they are doing i can put the work in. But as of now I am totally lost.

Pretty accurate. Yes, thats what they do.

Remember the yield curve has many products along it.

You can trade fed-funds, eurodollars (3 months - 4 years out), 2, 5, 10, 30 year products.

You can trade 30's-5s, 30's-2's (if youre nuts), Eurodollars-2s etc etc. You make up the combinations where you see opportunity - or focus on one part, but keeping an eye on the rest of the curve. Thats why the longer term perspective is important.

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  #14 (permalink)
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TheDude View Post
In fairness, I'm probably not the best person to answer as I dont day trade spreads. Although you wouldnt be using a chart to trade these per say, it may be an idea to build a tick chart of the spread if you have a good quote terminal (Ensign, CQG etc) that allows you to do so. You'll get an idea of the smoothness of the action from there.

The benefits arent necessarily that it's 'easier' in that the volatility isnt as fierce. It isnt (for me). The benefits are the reduced margin for correct ratio spreads. That means you can trade more spreads with the same money - which should make up for the reduced vol on a risk adjusted return basis.

The other big benefit is that if you are day trading spreads (or any other structure), you have more legs to play with to manage risk. You may decide there's an edge in legging in or out of the spread at times especially as you may only be making 1-2 ticks on a lot of trades.

As for learning about modified duration and yield curves, this is more for getting a longer term opinion about the spread, and the all important ratios - your prop firm will have these for you via bloomberg or something. As theres less volatility, the daily direction will have more pull than trading outrights.

Really though - if you are good at outrights, I wouldnt bother with spreads just because the firm asks you too - unless they are funding you 100%. Otherwise, there are plenty of arcades/prop firms around the world that allow remote traders and will 'sell you leverage' to trade bigger outright size if you want to - bigger than a retail broker will allow you.

I trade for the freedom, not to work for someone else - so maybe Im biased against prop firms???


TheDude View Post
Pretty accurate. Yes, thats what they do.

Remember the yield curve has many products along it.

You can trade fed-funds, eurodollars (3 months - 4 years out), 2, 5, 10, 30 year products.

You can trade 30's-5s, 30's-2's (if youre nuts), Eurodollars-2s etc etc. You make up the combinations where you see opportunity - or focus on one part, but keeping an eye on the rest of the curve. Thats why the longer term perspective is important.

OK! THANKS SO MUCH MAN!!!!!!!!!!!

Now this is going to sound naive but does the yield curve seriously change that much for these Bill Traders to be making trades every day? I mean they are suppose to be day traders right trading the spread. Or are they only making 1 or 2 trades a day or even 5 a week adjusting positions to the yield curve...

I never seen a Yeild Curve so i have no idea how often it changes.

I thought at these Propfirms they want there traders trading a lot and be profitable so they can reap brokerage commission too.


Last edited by joeyk; August 8th, 2013 at 10:21 AM.
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  #15 (permalink)
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TheDude View Post

Really though - if you are good at outrights, I wouldnt bother with spreads just because the firm asks you too - unless they are funding you 100%. Otherwise, there are plenty of arcades/prop firms around the world that allow remote traders and will 'sell you leverage' to trade bigger outright size if you want to - bigger than a retail broker will allow you.

Thanks for your reply.

Yeah its been a dilemma choosing whether to continue out rights or learn spreads. Trying to get as much information as possible. I really want longevity in trading. I keep hearing that the spreaders are making the most money at propfirms and seem less stressed. The ones with grey hairs and look old are all spreaders because the out right traders left the game or blew up some how. This bothers me because I want longevity in trading.

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  #16 (permalink)
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joeyk View Post
OK! THANKS SO MUCH MAN!!!!!!!!!!!

Now this is going to sound naive but does the yield curve seriously change that much for these Bill Traders to be making trades every day? I mean they are suppose to be day traders right trading the spread. Or are they only making 1 or 2 trades a day or even 5 a week adjusting positions to the yield curve...

I never seen a Yeild Curve so i have no idea how often it changes.

I thought at these Propfirms they want there traders trading a lot and be profitable so they can reap brokerage commission too.

cant really say.

You may see 20 trades a day in outrights, I may see 10. You may be going for 2-3 ticks each, I may only be interested in the big home run and happy to lose 8 times and a scratch before bagging 30-40 ticks. Similar with spreads or any trading.

Generally, the further down the curve you are, the bigger the move, and smaller size you can trade. So if youre trading at the front eurodollars, you could put on a 8000 spreads on easilly without any slippage (try doing that in zn or bunds!), but you may be waiting a day to make a tick. Theres more liquidity in the front as certainty is higher/probabilities are more sure.

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  #17 (permalink)
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joeyk View Post
Thanks for your reply.

Yeah its been a dilemma choosing whether to continue out rights or learn spreads. Trying to get as much information as possible. I really want longevity in trading. I keep hearing that the spreaders are making the most money at propfirms and seem less stressed. The ones with grey hairs and look old are all spreaders because the out right traders left the game or blew up some how. This bothers me because I want longevity in trading.

lol.

Probably something to that in fairness.

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  #18 (permalink)
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What do spread traders mean when the say I am looking for the mean reversion?

I've found out some information about these spread traders. I know a guy who knows a guy who spread trades at a prop firm.

My friend said that one of the things his trader friend looks at is the Mean Reversion back to 0, and his mate makes around 10 trades on average a day spreading aussie 3y and 10y with ZN and ZB.

Can anyone explain what this means?

I've been looking on the internet with not much luck.

If i can figure this out, i can now put the work into it and become good at spreading.

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  #19 (permalink)
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joeyk View Post
What do spread traders mean when the say I am looking for the mean reversion?

I've found out some information about these spread traders. I know a guy who knows a guy who spread trades at a prop firm.

My friend said that one of the things his trader friend looks at is the Mean Reversion back to 0, and his mate makes around 10 trades on average a day spreading aussie 3y and 10y with ZN and ZB.

Can anyone explain what this means?

I've been looking on the internet with not much luck.

If i can figure this out, i can now put the work into it and become good at spreading.

There is allot of good info in that book that Graham posted on the other thread, have you read that yet?

XS

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  #20 (permalink)
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joeyk View Post
What do spread traders mean when the say I am looking for the mean reversion?

I've found out some information about these spread traders. I know a guy who knows a guy who spread trades at a prop firm.

My friend said that one of the things his trader friend looks at is the Mean Reversion back to 0, and his mate makes around 10 trades on average a day spreading aussie 3y and 10y with ZN and ZB.

Can anyone explain what this means?

I've been looking on the internet with not much luck.

If i can figure this out, i can now put the work into it and become good at spreading.

If you can already read orderflow, spreading is an easy next step: buy strength/ sell weakness.

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