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Been killing some time in the office today and did some charting. Noticed an interesting dynamic whereby the CL M1/M2 spread begins to drift lower whilst other longer dated spreads hold closer together. Could be something interesting to look into.
Trump:
Elsewhere, I wonder how Trump's rhetoric and geopolitical 'style' will influence volatility in oil. We've seen his influence on the USD already and his tweets as a president are unprecedented. Will be interesting to see how the spread between WTI and Brent or Oman changes if we see Shale production continue to expand but conflicts in ME and potentially APAC with NK now in Trump's scope.
I was measuring CL flat px vs a variety of spreads. One interesting dynamic I noticed is that, depending on how much data you reference, the information gathered can look quite different. On the left is data starting Jan 2017 and on the right data starting June 2016:
So, with that being said how much data is too much? Any rules of thumb for this type of analysis?
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
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What spread is that?
That is something I ask myself all the time. One thing that makes the answer to that question difficult is that spreads behave differently (and become more volatile) the closer they get to expiration. So adding more data sometimes means adding more data that is removed in nature. Hence one thing I do quite a lot is look at how similar spreads behaved over several years as both a function of absolute price and time to expiry.
Its CLZ7 vs 9/0/1 - the graph is very interesting, especially the shape of that curve movement if just focusing on the data points from Jan 2017 onward.
Most daytraders come to the conclusion that simple is better (maybe after a few years). They stick to patterns, levels or vol profile type analysis and volume and some indicator(s) for confirmation. Whatever be the journey, from what i see here, there is a strategy of analysis and execution. Analysis could be vol profile, longer timeframe charts, coupled with fundamentals and then based on their execution strategy, they enter when the trigger is what they would like it to be.. why am i talking about this here?
I am trying to formulate this for spread trading.. focussed on crude... not having any reading material nor having any exposure to prop firms..so i know this is gonna be a lengthy process with lots of reading and trial analysis.
Anyway so we have
1) Fundamental analysis: For this we have economic factors, outcomes of events like Opec decisions, flat price forward curves (contango/backwardation); Seasonal as well (but i am not giving it much weight here as we are trying to look forward for a discrepancy or a tradeable probability)
2) Forward curve charts:
- This could be comparing the flat prices, calendar spreads, flys etc
- This could have a time element to it... i.e. forward curves for every month, every 3 month etc which is also applicable to calendar spreads or flat prices
3) Correlation charts: Comparing the curves of different instruments on same graph
- This could be just plotting different curves/prices of flat, calendar etc on same graph
- Plotting different prices of future flat/clalendar/fly prices against the front month over a period of time
Note: I think its always a good idea of downloading easily these prices so any curve or combination can be plotted in excel
NOW: This is only data (and hopefully someone will comment if i left something out)
Analysis piece: This is where formal training or practice is a huge jumpstart. I have not reached the stage where I can summarize how i go about this and hence my intro of how day traders approach this to give some background.
For example:
Do we first determine we want to trade a calendar or fly? Then if Calendar, do we decide roughly is it going to be near term or long term
Once we do this, do we
- Plot the correlations to identify discrepancies?
- Once we think , we see a discrepancy, do we use then forward curves and fundamental analysis to form a hypothesis as to what might happen to the curve that has the discrepancy
- Wonder if seasonal tendencies are worth analyzing, if we are using supply/demand and relevant news events to guide this analysis?
- If we are trading calendar spreads is there much use with plotting the flys as well for those months
Comment: Do prof firms do all this daily? or just look at correlation charts and trade a strategy like mean reversion or directional once they are convinced of the fundamentals
Execution and Management of the trade : Who different sets of questions.. not worth discussing yet.. since that might be the easiest part with the right tools
Feel free to comment/tear apart.. or even message me if you would like to do homework together
You may find the following useful, I found the material by J. Choi particularly useful when trying to understand some of these new concepts. Read through related posts on this forum, SMCJB has written tons of great stuff on spreads which is where I've learnt the most.
