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ZN and ES are both good instruments to trade based on its liquidity and somewhat low volatility.
ES seems to be manipulated more since many bots are designed to trade it. Not sure if ZN is similar in this regard.
As far as momentum trading, which one is more suitable? What are the pros and cons of each instrument?
Here comes an extension of the analysis to currency futures, CL, GC, SI and ZB. It is an analysis of the impact of transaction costs and slippage on the profitability of a simple strategy with
- 60% profitable
- and a win - to - loss - ratio of 1:1
…
Thanks Big Mike! I have read that thread but I do not believe that is what I'm looking for.
Besides the usual answer of "it fits my trading style better", I want to know what attributes of each instrument that would attract people to trade it?
For example, good attributes of ES are high liquidity, very technical, can be trendy at times, etc.
Bad attribute might be that it is manipulated most often.
ES is perhaps the most liquid market in the world, and hence the one least likely to be controlled by one or few entities.
On the other hand it will always be rotational, since it the risk super-market of the world, with people, buying/selling for a gazillion reasons, on infinite time frames.
IMHO a trader should throw the word manipulation out of his/her trading vocabulary.
I think that each instrument has its own characteristics. They are like a different species in a common jungle.
The bond market is dominated by professionals. It is dry and very technical. Need to know what is a duration, a cheapest to deliver, need to be informed about the auctions being held for bonds and treasury notes, should be connected to the financial community, requires more patience than equities, not a good market for nervous characters, but those who enjoy watching paint to dry.
Equities are more for creative traders, the moves of ES or YM are more following group behaviour than mean reversion or extensive reasoning. ES will suddenly move up or down, then retrace and do something different, not as mad as crude oil, but half way in between crude and bonds. ES traders have little mathematical skills, bond traders are supposed to have a thorough understanding what they are doing.
I am not trading the bond markets for several reasons. I do not really understand it yet. I am still not patient enough to systematically follow that market. I am not well connected to have an idea how the auctions may play out. I have no idea when the Chinese will raise their rates the next time either.
So ES or YM are easier, price action is not created by exogenous factos, but can be studied endogenously. Think that technical analysis can be used here with little fundamental knowledge, as most of the price action follows the path of self-fulfilling prophecy or group psychology.
That was a rather personal view. Maybe this will change with the time.
But then tell me what happened today:
4:40 AM Est: ZN suddenly dropped (arrow), no reaction from the equity or commodity markets
5:30 AM Est: CL and ES suddenly drop, CL over 1%, ES 0.25%, no reaction from the bond and treasury note markets
8:30 AM Est: ZN shows a strong reaction, ES a weaker one.
The different markets do not follow the same news circuits. In the morning China raises interest rates by 50 bps. No reaction from the equity markets and crude oil, although this could mean that the latest bubble party is soon over. Seems that the ES and CL traders were more focused on Bernanke's scheduled speech. Looks like a gaming party of speculators. Who is capable of hitting the button first - but not too early. Cl dropped on percent and the regained all the loss during 5 minutes. Would your stop loss being hit?
Seems that bond traders are focussing on facts and equity traders focus on rumours. Maybe another prejudice, but what about the chart below? Anybody who knows better?
On thing you need to look at in the bond markets is the spreading. As people are also trading the interest rate curve, the relationship between the ZN and ZB was a little out of line or traders noticed a selloff in the ZF and started pounding the ZB. You can trade the Bonds without looking at the relationship of course.
If you are looking for more information, you may want to take a look at “Trading STIR Futures" by Stephen Aiken, I know Euronext uses that book in their training. It is slanted toward European markets but still good.
Here is another thing about the ZN, the trading hours are earlier which may help / hurt depending on your time zone.
Also note that the Bund , Bobl and Schatz work a little bit differently than the US Bond market if you want to trade the Bund early and then the ZN.
I noticed an Inverse correlation between the ES & ZN. Most of the time when the ES goes flying in one direction, the ZN would go flying in the opposite direction. But some of the times they will break-out together in the same direction & that can get pretty ugly when you are pointing the wrong way...
If you look at the chart above, the correlation is not inverse but positive. This is type of correlation is never stable, it really depends on the environment.
Flight to safety -> hurts ES, pushes ZN -> creates an inverse relationship
Bad economics -> calls for lower interest rates -> favors ES, favors ZN -> creates a positive relationship
yesterday there was the People's Bank of China with a sudden rate hike to contain monetary expansion, this can be seen as a threat to economic growth -> should favor a decline in the stock market. And it should have a negative impact on bonds and treasuries as well, as US bonds look even less attractive, if Chinese rates are higher. And indeed the chart above shows positive correlation between ES and ZN
The point is that one needs to find out which type of correlation is currently prevailing, and than adapt the trading strategies.
