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Pairs trading


Discussion in Emini and Emicro Index

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Pairs trading

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  #21 (permalink)
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LittleFinger's Avatar
 
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You want:
liquidity: always
small increments of the thing being traded: due to small account and the need to trade multiple contracts so that you can balance out the real dollar value of your spread currencies as SMCJB was explaining.

So I think you should be trading spot forex

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  #22 (permalink)
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crazymatrix View Post
I started investigating this because I watched a few videos by Anton Kreil. He follows 'global macro' and takes a top-down approach, analyzing geopolitics, countries, sectors, then finally individual products. He claims that the best way for retail traders to be successful is to trade more like an institution: i.e. have a set of rotating hedged positions that offset each other instead of having a single position open with a lot of risk. I'm not planning to outdo those guys at statistics, I just want something a bit more stable.

Global Macro is a good strategy if you have a youtube channel because you can generate a ton of content without being provably wrong on anything.

IMO that is totally absurd advice for an under capitalized retail trader paying retail transaction cost and retail margin rates. There is no reward without risk. The world has more capital and liquidity than anyone knows what to do with. If anything you probably get over rewarded right now for taking directional risk because everyone is so risk averse. A new trader wanting to delta hedge a $4k account is really a perfect example of the current zeitgeist.

The consensus is only good to know what not to do.

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  #23 (permalink)
Berlin, Germany
 
 
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SMCJB
So you are in reality just creating a different non-USD cross which isn't really a spread. (Hence IV adjusting them is hogwash)

Thanks for the examples. Is there a situation where I would have to IV adjust futures pairs though? How does that work?




centaurer
If anything you probably get over rewarded right now for taking directional risk because everyone is so risk averse. A new trader wanting to delta hedge a $4k account is really a perfect example of the current zeitgeist.

Thanks -- so I'll just continue improving my directional trading for now (pairs or otherwise) and in the meantime just keep saving up more money.

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  #24 (permalink)
Legendary Market Wizard
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crazymatrix View Post
Thanks for the examples. Is there a situation where I would have to IV adjust futures pairs though? How does that work?

Oh yes in many cases. That was what I was referring to when I said this

SMCJB View Post
Do you understand what a Beta of a Stock is? In a common equity pairs trade you would want to structure the trade so you are Beta Flat or Neutral this is very different than dollar flat or share flat.

I just assumed Beta would be a more common explanation to you than IV.

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  #25 (permalink)
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SMCJB View Post
Oh yes in many cases. That was what I was referring to when I said this

I just assumed Beta would be a more common explanation to you than IV.

Ah I get it, thank you! So tomorrow is a new week -- time to try it all out.

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  #26 (permalink)
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For equity indices futures spreads, there is a white paper on CMEgroup website.
The common spreads are NQ/ES, YM/ES, ES/EMD, EMD/RTY.

NQ/ES -- Buy when Tech stocks are expected to outperform the broader markets. Always check news about FAANG stocks and any good news about FAANG stocks would cause NQ to outperform ES. Intraday difference between NQ%-ES% change ranges from 0-1% but hardly ever more than that. If one buys 1 Long NQ and 1 short ES, each 0.1% difference in spread is about $100.

YM/ES -- YM and ES has different sectoral weightages and thats why the spread between them converges or diverges. When trading this spread, especially check the Tech, Industrial and Utility sectors or their ETFs. Some stocks like 3M,GS,APPL, Boeing have quite different weighatages in YM and ES and thats why the spreads move. On the day of Boeing accident news, ES outperforomed YM by more than 1%. Attaching sector weightages here.

ES/EMD or ES/RTY is spread between large, mid and small cap segments, but not very popular.

NYMEX has some good exchange traded spreads with better liquidity than outrights.
CL/BZ, CL/RB, CL/HO cracks spreads along with calender spreads of CL, BZ,NG, RB are some interesting products.
The NG and HO are seasonal spreads with a peak during winters. CL and Brent spreads are mostly dependent on supply/demand, geopolitical news and its forward curve whether in contango or backwardation.

Spread charts on EOD basis and various other features can be found on https://www.spreadcharts.com/

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  #27 (permalink)
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Just wanted to encourage you to keep exploring this option. Iíve been actively trading the RTY/ES spread for a few months now (as a retail trader) and its one of my more profitable strategies. You need to find an edge in it that works for you though, and more importantly a risk management plan that keeps you from blowing up. When spreads run against you the dollar amounts add up quickly.

I keep it very simple. I donít trade it on trend days, so Iím only looking to trade it on days that are mean reverting early in the session.

Then Iím looking for mean reversion based on standard deviations.

And have daily risk limits to prevent myself from taking on too much risk if the spreads run against me too far.




Sent from my iPhone using futures.io

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  #28 (permalink)
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Eran Raviv :- Ordinary Least Squares, Least Absolute Deviation and Huber Regression in Pairs Trading

https://eranraviv.com/adaptive-huber-regression/

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  #29 (permalink)
Legendary Market Wizard
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Optimus Futures :- How to Trade One Index Against Another Using Micro E-Mini Futures

https://optimusfutures.com/tradeblog/archives/trade-micro-e-mini-futures

Little bit "discretionary" for my liking but topic relevant none the less.

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  #30 (permalink)
Dallas, TX
 
Experience: Intermediate
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Interesting discussion; thanks to all. I have been trading (B/S) NQ-(B/S) YM micros for about a month with very good results. I think the key is to think of probability of touch and/or the different volatility for each contract. If you trade small and are patient you can do well with this spread. They key is not to expect 1/1 risk/reward, trade very small size, and actually add ( yes add) to your losers. And you have to keep your eyes charts most of the time, no set it and forget it here.

Based on my detailed bar by bar reviewed charts, and using the mini contracts, you will get a big loss (not a black swan event, but hurtful) possibly once a year. I have met a guy the have traded the minis ( YM/NQ) successfully for years. He picks up $200-300 per trade, even with the once a year event, he is still profitable.
I do use my own propriety indicator that does help me get in with acceptable draw, but you can do this with % up/down for both pairs. To me, this pair trade seems to be doable, so far. Of course, as we all know in trading everything works until it stops working.
I trade 3 lots on each side, then add 1-2 if the spread gets more "out of wack". So yes I do add to a loser, almost daily. But again still small ( compared to account size). I get out with $50-80 and will at times see a $140 draw. I recently started a journal that shows a couple of those trades ( ). I also daytrade stocks, some Forex and futures using VSA/Price action. Maybe we can work on micro pair trading as a group here.
I hope to see more of this discussion and good weekend to all.
K

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November 15, 2019


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