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Outright or Spreads?
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Created: by joeyk Attachments:0

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Outright or Spreads?

  #1 (permalink)
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Outright or Spreads?

Hi Guys.

Ive been trading out rights on ZN and ZB and becoming consistent. I trade price action order flow.

Lately i've been looking into spreads just to get informed about it because there's obviously a lot of spreading going on especially on the NOB (ZN and ZB spread).

My question is this:

Does anyone know statistically speaking if there are more successful spread traders then out right traders?

A Propshop I will be joining next year said that they train trainee traders to spread trade the bonds market especially ZN and XT spread.

Why am i asking this question

If there are more successful spread traders then I would rather be trading spreads then out rights. I want to go down the path most commonly taken. Of course anyone can say do what you think you're better at and so on, but i would love to know if you's know if there's more successful Spreaders then out right traders.

If your a consistent Spread Trader can you tell me some of your stats please?
1. How many ticks on average do you make a day or week?
2. How many trades on average do you make a day or week?

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  #2 (permalink)
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  #3 (permalink)
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Great question Joey, however i somehow suspect that futures.io (formerly BMT) has a higher % of retail traders compared to Prop traders and therefore a high % of directional vs spreaders. I know from my discussions with the Propex guys that over 90% of their traders are bill spreaders. Very few directional traders left these days...

Maybe you could do a poll?

XS

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  #4 (permalink)
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Yeah totally understand.

Well propshops have a higher % of successful traders so it makes sense to do what they do right hence the reason im asking this question.

Yeah the guys at Propex is a Aliom are spreaders. That's why im thinking i should be spreading instead of trading outrights.

I would love to know some stats from a successful spreader trading bonds.

How many ticks on average are they making a day or week?

How many trades are they making a day?


This will help form the frame work and stats for me to hit too. If they are making 5 trades and 6 ticks a day on average spreading i can then know if im over trading when im making 10 trades a day.

Ive become decent at reading the order book and price action but im looking for longevity in trading so i would love someone with insight into this. Last thing i want is to keep trading outrights then 1 year from now want to trade spreads. If im gona end up spreading i should just do it now.

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  #5 (permalink)
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joeyk View Post



If there are more successful spread traders then I would rather be trading spreads then out rights. I want to go down the path most commonly taken.



Don't you think it plays also a role HOW successful the successful spread traders are? You are only asking whether there are MORE successful spread traders than directional traders (similar to comparing trading strategies by win rate only vs also considering the relation avg. winners/avg. losers). I'd say, the EXTENT of success (or, the EDGE) plays a role, too.

Going "down the path most commonly taken" can also be a bad thing, depending on your individual risk tolerance and your expectations for reward. For instance, if you want to start a business, do you rather copy an existing business model with x competitors already in the market or do you try to do something new? The risk of the latter is, of course, much higher, but it's potential reward is higher, too.

Just food for thought...

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  #6 (permalink)
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karoshiman View Post
Don't you think it plays also a role HOW successful the successful spread traders are? You are only asking whether there are MORE successful spread traders than directional traders (similar to comparing trading strategies by win rate only vs also considering the relation avg. winners/avg. losers). I'd say, the EXTENT of success (or, the EDGE) plays a role, too.

Going "down the path most commonly taken" can also be a bad thing, depending on your individual risk tolerance and your expectations for reward. For instance, if you want to start a business, do you rather copy an existing business model with x competitors already in the market or do you try to do something new? The risk of the latter is, of course, much higher, but it's potential reward is higher, too.

Just food for thought...

Yeah you make a good point.

I just wanted to get some light on this spread traders and outright traders. Im at cross roads and really can't decide.

There has to be a reason why Propex and Aliom Group train spread traders. So it would be good to know some stats. They must feel like its easier to train a successful spreader.

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  #7 (permalink)
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If you're successful at outrights, why would you change? Stick to what you're good at especially regards to day trading (just personal experience)

Your questions seem a bit odd anyway, as the results really depend on the individual more than the method. Im sure you get this if you are a successful outright trader.

Either way, you must remember that if you trade spreads, your brokerage instantly doubles.

Generally, prop firms trade spreads in 3 ways:
1. spreads against spreads to give a fly, then working the fly for a tick or scratch (rebate trading - they like to think of them selves as market makers) - common with products with many expiries (stirs, crude etc)
2. scalping orderflow in treasuries/iner commodity (much more complex) - learn about modified duration, yield curve etc
3. position trades - generally starting in a close spread, and then trading down the curve to get more exposure if the trade plays out eg trading ho x3-z3, then ho z3-h3 to give you a position of ho x3-h3 etc - using the spread to manage risk once an opinion has been established.

Spreads generally give a smoother equity curve as trends are more persistent. ALL professionals trade spreads - much more than outrights for these reasons. Return on margin is also superior to outrights - something that doesnt impact the average 'retail' trader who just thinks in terms of 2% of capital at risk - for no other reason he read it in a book.

If you think about it though, an outright is a spread. You are spreading the product you trade against the currency in your account. You believe one will increase in value quicker than the other.

I day trade outrights. I position trade spreads (Welcome to Moore Research Center is a good source of trade ideas and spread analysis)


Last edited by TheDude; August 5th, 2013 at 09:32 AM.
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  #8 (permalink)
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joeyk View Post
They must feel like its easier to train a successful spreader.


No - they just risk losing less money on some newbie blowing up on the off side of NFP and taking the firm with him.

Also, consider the margin offsets - a room of 50 guys all trading spreads. Think of the probability distribution of their positions and you can understand that they can margin the whole room for very little money indeed - even if they trade size.

This means the boss of the firm gets a better rates at the exchange and with his FCM - which he may - or may not pass onto the traders. Eitherway, it adds to the owner of the prop firms bottom line.

Less risk, more profit. OR let some cowboy lose on ES and watch your kids college fund go up in smoke. Tough choice!

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  #9 (permalink)
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TheDude View Post
If you're successful at outrights, why would you change? Stick to what you're good at especially regards to day trading (just personal experience)

Your questions seem a bit odd anyway, as the results really depend on the individual more than the method. Im sure you get this if you are a successful outright trader.

Either way, you must remember that if you trade spreads, your brokerage instantly doubles.

Generally, prop firms trade spreads in 3 ways:
1. spreads against spreads to give a fly, then working the fly for a tick or scratch (rebate trading - they like to think of them selves as market makers) - common with products with many expiries (stirs, crude etc)
2. scalping orderflow in treasuries/iner commodity (much more complex) - learn about modified duration, yield curve etc
3. position trades - generally starting in a close spread, and then trading down the curve to get more exposure if the trade plays out eg trading ho x3-z3, then ho z3-h3 to give you a position of ho x3-h3 etc - using the spread to manage risk once an opinion has been established.

Spreads generally give a smoother equity curve as trends are more persistent. ALL professionals trade spreads - much more than outrights for these reasons. Return on margin is also superior to outrights - something that doesnt impact the average 'retail' trader who just thinks in terms of 2% of capital at risk - for no other reason he read it in a book.

If you think about it though, an outright is a spread. You are spreading the product you trade against the currency in your account. You believe one will increase in value quicker than the other.

I day trade outrights. I position trade spreads (Welcome to Moore Research Center is a good source of trade ideas and spread analysis)

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.


Last edited by joeyk; August 7th, 2013 at 08:28 PM.
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  #10 (permalink)
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karoshiman View Post
Don't you think it plays also a role HOW successful the successful spread traders are? You are only asking whether there are MORE successful spread traders than directional traders (similar to comparing trading strategies by win rate only vs also considering the relation avg. winners/avg. losers). I'd say, the EXTENT of success (or, the EDGE) plays a role, too.

Going "down the path most commonly taken" can also be a bad thing, depending on your individual risk tolerance and your expectations for reward. For instance, if you want to start a business, do you rather copy an existing business model with x competitors already in the market or do you try to do something new? The risk of the latter is, of course, much higher, but it's potential reward is higher, too.

Just food for thought...

Indeed, it would be as foolish to believe that trading spreads (which involves less risk) would not demand a reward discount, just as the treasury yield commands compared to junk.

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