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Spread / Pairs Trading - the allure and the reality


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Spread / Pairs Trading - the allure and the reality

  #101 (permalink)
 kevinkdog   is a Vendor
 
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datahogg View Post
Kevinkdog. If you were to plot a ratio of a 5 minute EMA (exponential average) of ES and a 5 minute EMA of NQ,
would this be a reliable spread chart??

If you are certain each and every data pair is at the same exact time, it should be accurate.

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  #102 (permalink)
 datahogg 
Knoxville Tennessee USA
 
Experience: Intermediate
Platform: TOS
Trading: ES, NQ, CL, /6E futures options.
Posts: 346 since Oct 2012
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kevinkdog View Post
If you are certain each and every data pair is at the same exact time, it should be accurate.

I was thinking since the EMA is of a 5 minute period (or maybe better a 30 minute period) that the problem of a lack of
exact identical times would not introduce a large error?

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  #103 (permalink)
 kevinkdog   is a Vendor
 
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datahogg View Post
I was thinking since the EMA is of a 5 minute period (or maybe better a 30 minute period) that the problem of a lack of
exact identical times would not introduce a large error?

I guess it depends on what you are doing with it, and what for your purposes is considered a large error. For your situation, it might not matter at all if they are off a little bit.

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  #104 (permalink)
 datahogg 
Knoxville Tennessee USA
 
Experience: Intermediate
Platform: TOS
Trading: ES, NQ, CL, /6E futures options.
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kevinkdog View Post
I guess it depends on what you are doing with it, and what for your purposes is considered a large error. For your situation, it might not matter at all if they are off a little bit.

You are experienced in spread trading, do you know if MCRI or SeasonAlgo provides better information?
Thanks H. Hampton.

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  #105 (permalink)
 kevinkdog   is a Vendor
 
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datahogg View Post
You are experienced in spread trading, do you know if MCRI or SeasonAlgo provides better information?
Thanks H. Hampton.

Never used SeasonAlgo, and I only use MRCI for end of day research (settlement prices).

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  #106 (permalink)
 datahogg 
Knoxville Tennessee USA
 
Experience: Intermediate
Platform: TOS
Trading: ES, NQ, CL, /6E futures options.
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kevinkdog View Post
I guess it depends on what you are doing with it, and what for your purposes is considered a large error. For your situation, it might not matter at all if they are off a little bit.

I have been using the ratio of 2 moving averages for (ES-YM) with mostly good results.
According to my charts the spread (ES-YM) has been trending down since July 25, 2017.
I use Sierra Charts which has good applications for ratio and difference charts.
But I have not been able to chart the calendar spreads very well ( CL - CL for example.)
Thanks H. Hampton.

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  #107 (permalink)
 kevinkdog   is a Vendor
 
Posts: 3,647 since Jul 2012
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datahogg View Post
I have been using the ratio of 2 moving averages for (ES-YM) with mostly good results.
According to my charts the spread (ES-YM) has been trending down since July 25, 2017.
I use Sierra Charts which has good applications for ratio and difference charts.
But I have not been able to chart the calendar spreads very well ( CL - CL for example.)
Thanks H. Hampton.

Instead of tracking price, maybe track midpoint between bid and ask. That might work a lot better, as long as the bid and ask are "fresh."

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  #108 (permalink)
 datahogg 
Knoxville Tennessee USA
 
Experience: Intermediate
Platform: TOS
Trading: ES, NQ, CL, /6E futures options.
Posts: 346 since Oct 2012
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Does anyone use correlation as an input in decision making for spread/pairs trading?

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  #109 (permalink)
 bomberone1 
London
 
Experience: Beginner
Platform: MultiCharts
Posts: 277 since Nov 2010
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Do someone code the CO-INTEGRATION spread indicator (not correlation indicator) to plot the value of the spread, in easylanguage for Multicharts?

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  #110 (permalink)
 ZB23 
Atlanta Metro Area
 
Experience: Intermediate
Platform: Rithmic API
Broker: Ironbeam
Trading: Futures: CL spreads, IR outright.
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Duration: Never
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indiantrader View Post
@josh

Here is the margin credit information about ES vs NQ

https://www.cmegroup.com/trading/equity-index/us-index/e-mini-nasdaq-100_performance_bonds.html

Check equity index and select ND-nasdaq, it will show synthetic pairs, the ratios recommended by CME and the margin credit offered by them.

Regarding z-score, it s mainly used for pairs that show fairly good mean reversion.

The spread pairs like synthetics (ES:NQ,CL:BRN,Corn:wheat), calenders have a tendency to diverge and form a trend...its these spread pairs for which TA indicators can be applied.
The spread pairs like butterfly, condor, synthetic interexchange( CL vs WBS-ICE or cash vs futures or interexchange corn/wheat spreads) show a tendency towards mean reversion where z-score works well.

I am still training with Peter Hamby (SpreadProfessor), but my understanding is this.

High correlation, High co-integration---->trade for mean reversion
High correlation, Low co-integration-----> trade for diversion/widening of the spread pair

Basically, the opportuniy for a spread trade arises when the correlation is out of place temporarily, so pairs with correlation coefficient of 0.95 and less but more than 0.85 are favourable pairs.

There is one webinar on Advantage futures website on trading spreads.
Trading the European [AUTOLINK]Yield[/AUTOLINK] Curves - YouTube

He describes the spreads construction like TED and butterfly Vs Butterfly where most of the charts look like a horizontal channel and trades are taken at extremes of the ranges and target the mean.

Correlations can be studies at Commodity Systems Inc. ? [AUTOLINK]EOD[/AUTOLINK] Market Data and Trading Software by subscribing to the correlation lab service and it shows quite interesting findings eg. Light sweet crude and brent have just 61% correlation for the last 2 years


It's been seven years since you were introduced to spread trading. Are you still trading spreads?

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