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Pairs trading


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Pairs trading

  #11 (permalink)
crazymatrix
Berlin, Germany
 
Posts: 7 since May 2019
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SMCJB
NO. Equity Calendar spreads are purely a function of Cost of Carry versus Dividends. They are arbitragable by the big players. They don't move around like many commodity calendar spreads.

Thank you for pointing that out. I'm not sure of the finer details yet.



SMCJB
Now you seem to be reaching to just find something you can trade!

To some extent, yes -- I can't do much with $4000 -- and I'm just looking around at various possibilities. I might just keep trading MGC directionally for now, keep studying and saving, then come back next year with more money and more knowledge.


Anyway, thanks for the quick replies.

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  #12 (permalink)
 
LittleFinger's Avatar
 LittleFinger 
Denver Colorado/USA
 
Experience: Intermediate
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crazymatrix View Post
For example, I'm planning to try this out with the new micro futures, Micro E-mini S&P 500 (MES) and Micro E-mini Dow (MYM).

I'd consider calendar spreads or metals vs the dollar

edit: oops you already mentioned calendar spreads.

if you didn't mention currencies maybe something like gbp/eur would be a good choice

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  #13 (permalink)
crazymatrix
Berlin, Germany
 
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LittleFinger View Post
I'd consider calendar spreads or metals vs the dollar

Ah, maybe MGC against M6E or M6B might be a better fit for me?

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  #14 (permalink)
 
LittleFinger's Avatar
 LittleFinger 
Denver Colorado/USA
 
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Yeah the micros could work for you. NZD/AUD is another one

JPY/ES

edit:
i mean nzd/usd vs aud/usd and jpy/usd vs es

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  #15 (permalink)
 centaurer 
south africa
 
Posts: 169 since Dec 2018


crazymatrix View Post

It's not for no reason. I'm deliberately looking for strategies that are directionally neutral and looking for contracts and situations where I can apply them. .

I guess I mean a strategic reason as opposed to a predetermined desire.

My limited understanding of pairs trading is you should have some kind of scan to find pairs that are cointegrated. If the pair is not cointegrated then you can't take a proper average to judge the divergence. Of course there is a risk if you look at enough data you will find basically spurious cointegrated pairs. There is also a risk that the cointegration is ready to break down.

The bigger problem to me though is you are playing a game that David E. Shaw practically invented. If you find a cointegrated pair with simple statistical techniques and that pair has diverged then the masters of this space are not interested in it or they would have already closed it.

You really just end up trading directional risk for modeling risk and for me I am more afraid of my modeling risk than directional risk.

Directional risk is a much bigger deal if you hold illiquid positions. No one reading this has that problem. You can get out with minimal market impact.

I mean part of the appeal of neutral strategies is to package it in the form of a hedge fund and sell it as a product to accredited investors that already have enough directional and market risk.

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  #16 (permalink)
 
TrendLineBRK's Avatar
 TrendLineBRK 
Portland Oregon
 
Experience: Advanced
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Trading: ES, CL, GC, 6E, 6J
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crazymatrix View Post
Ah, maybe MGC against M6E or M6B might be a better fit for me?

I second the notion of currency futures pairs. I've traded many of the pairs available on TOS. Another added feature of pairs is they lend themselves to swing trades as opposed to scalps or day trading which helps if you can't sit at a screen all day (and night). Plus, your per unit risk is lower than a one sided traded.

I will also suggest that pairs trading is not non-directional, you must have a bias as to the spread widening or narrowing. The directional nature of pairs is just different, which segues to my last point. Solve your directional challenges. To be be a successful trader, you must have a directional bias that is correct most of the time.

Everyone has their own approach and finding what works for you takes time. It's like wandering in the desert until one day when you finally walk out. I use support and resistance (trend lines, Fib and pivots) along with general price action. No indicators except the 25 EMA. Here's my NQM19 chart from Friday. I was able to trade both sides from the Globex session to EOD. It was a good day.

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  #17 (permalink)
crazymatrix
Berlin, Germany
 
Posts: 7 since May 2019
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centaurer
I mean part of the appeal of neutral strategies is to package it in the form of a hedge fund and sell it as a product to accredited investors that already have enough directional and market risk.

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.




TrendLineBK
I second the notion of currency futures pairs.

Yes, I'll probably do this -- either two currencies or a currency with gold. I watched an introduction to the new micro contracts today by tastytrade: "CME's New Micro Futures" -- youtube IRKKlAHp92I (I still can't post links). They give an example trade:

 
Code
+---------+----------------------------+----------+
| Product | IV adjusted notional value | Position |
+---------+----------------------------+----------+
| /M6E    | $775                       | +2       |
| /M6B    | $582                       | -3       |
+---------+----------------------------+----------+

IV adjusted notional value = notional value * IV%
Then the ratios of the final positions should be adjusted to make the new notional values match up as closely as possible.

I understand the idea that they want to match up the sizes by adjusting the ratios, but I don't understand where the figures come from. I thought that IV was related to option pricing, so how does IV come into play with futures?

More simply, how can I choose the ratios in a pairs trade?

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  #18 (permalink)
 
SMCJB's Avatar
 SMCJB 
Houston TX
Legendary Market Wizard
 
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crazymatrix View Post
 
Code
+---------+----------------------------+----------+
| Product | IV adjusted notional value | Position |
+---------+----------------------------+----------+
| /M6E    | $775                       | +2       |
| /M6B    | $582                       | -3       |
+---------+----------------------------+----------+

IV adjusted notional value = notional value * IV%

It's difficult to do this with currency futures, as the futures you are talking about are both USD crosses.
So you are in reality just creating a different non-USD cross which isn't really a spread. (Hence IV adjusting them is hogwash)
Additionally since the contracts are not the same size, it gets very dirty quickly.

For example
M6E is EUR 12500 which at current rates (1.1265) is USD 14081
M6B is GBP 6250 which at current rates (1.3032) is USD 8145

So if you buy 2 M6E and sell 3 M6B your position is
2 * (EUR 12500 - USD 14081) - 3 * (GBP 6250 - USD 8145)
which is
Long 25000 EUR, Short 18750 GBP and Short 3727 USD
which is really a
EUR/GBP currency trade (21691 vs 18750) and a EUR//USD currency trade (3309 vs 3727)
probably not what you were expecting.

Now if you did 6E vs AJ that wouldn't be the case. But all the currency micro's are USD crosses.
For what it's worth AJ (AUD:JPY) only traded 348 lots on Friday in the full size contract.

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  #19 (permalink)
 
TrendLineBRK's Avatar
 TrendLineBRK 
Portland Oregon
 
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CME has the notional value for all their contracts - see their website.. Using IV is a twist I've not used before.

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  #20 (permalink)
 
SMCJB's Avatar
 SMCJB 
Houston TX
Legendary Market Wizard
 
Experience: Advanced
Platform: TT and Stellar
Broker: Advantage Futures
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,041 since Dec 2013
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Thanks Received: 10,192


+2 M6E, -3 M6B gives a $3727 or 13.2% mismatch
+3 M6E, -5 M6B gives a $1518 or 3.6% mismatch
+4 M6E, -7 M6B gives a $690 or 1.2% mismatch
So if your goal is to actually have a EUR:GBP currency trade those ratios will make it considerably cleaner.

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