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Spread / Pairs Trading - the allure and the reality


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Spread / Pairs Trading - the allure and the reality

  #111 (permalink)
 
josh's Avatar
 josh 
Georgia, US
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ayenir View Post
It's been seven years since you were introduced to spread trading. Are you still trading spreads?


Great question! Let me clarify and say that I was never really introduced to it, I just gave it a brief whirl.


If you can trade exchange traded spreads it's the way to go. For example, I have recently traded VIX futures calendar spreads. It's much easier than trying to leg in.


I have recently contemplated putting on some NQ/RTY spreads due to the relative strength of NQ, but ultimately these relationships do fluctuate and I find it easier on my tiny brain to just trade outrights in general.


Really though, a trade like this is ideal in a time like this if you're willing to let it work a few days, IMO. But I just haven't been inclined to give it a look, but perhaps I will now, thanks for the bump here!

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  #112 (permalink)
mosalem2003
Toronto
 
Posts: 102 since Apr 2019
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Which broker can allow access to exchange spreads ? Or who are the brokers that would recognize spreads and reduce the margin as per SPAN. I want to trade yield curve spreads and commodity spread but not sure if any retail broker can understand it. I am with AMP and IBKR now.
Ex If I want to trade NOB spread 5 ZN - 2 ZB... This is 7 contracts to leg it and can be a huge margin if not treated from the broker as spread.. also how can I trade the symbol NOB to reduce the accuracy requirements and timing of legging .. This is not a clear area in the retail .. any recommendation of brokers who allow or recognize spreading or tools or platforms are appreciated. I use Sierra Chart and IBKR TWS..

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  #113 (permalink)
 
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 SMCJB 
Houston TX
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I would have thought the ability to trade 'exchange listed spreads' was more a software related issue rather than a 'broker issue'. For example with Tradestation if you use their main Tradestation software, you have no access to exchange listed spreads but if you use their Futures Plus software (which is now just rebranded/white labeled TT but even prior to that it was the same) you do have access to them.

Margin requirements will be broker specific. All the bigger FCMs offer this, but I'd be speculating on others, I would be surprised if either AMP and IBKR didn't offer spread offsets though.

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  #114 (permalink)
limitdown
Danbury, CT
 
Posts: 4 since Mar 2020
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I am really glad this thread is being discussed, and remains current, and not stale by a few years old and no commentary since.

I first came across pairs trading by a Canadian trader who specialized in equity trading. At the time, the objective was to increase actual trading volume because the prop shop benefitted from the commissions and not whether or not you win or lose. The scenario shares many threads to these funded trader shops in their practices not being inline with one's profitability or capability or learning curve.

I am very impressed to see that the concept of pairs trading has been applied to futures index trading, although spread trading has existed for almost ever.

my biggest question is whether this applied spread concept works best towards the highest volume emini / emicro futures or relies more heavily on symmetry and co-relation, such as when the ES and NQ trade in tandem and the YM trades opposed to their trend?




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  #115 (permalink)
 ZB23 
Atlanta Metro Area
 
Experience: Intermediate
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mosalem2003 View Post
Which broker can allow access to exchange spreads ? Or who are the brokers that would recognize spreads and reduce the margin as per SPAN. I want to trade yield curve spreads and commodity spread but not sure if any retail broker can understand it. I am with AMP and IBKR now.
Ex If I want to trade NOB spread 5 ZN - 2 ZB... This is 7 contracts to leg it and can be a huge margin if not treated from the broker as spread.. also how can I trade the symbol NOB to reduce the accuracy requirements and timing of legging .. This is not a clear area in the retail .. any recommendation of brokers who allow or recognize spreading or tools or platforms are appreciated. I use Sierra Chart and IBKR TWS..

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I know Infinity Futures understand SPAN margin and can calculate risk correctly. When I was with them in 2017, a BUB spread (ZB - UB) was approximately $1700 to put on.

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  #116 (permalink)
 datahogg 
Knoxville Tennessee USA
 
Experience: Intermediate
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Trading: ES, NQ, CL, /6E futures options.
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It seems that most charting packages do not plot spreads accurately.
For those with experience, what trading platform charts spreads best.
Thanks in advance.

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  #117 (permalink)
 
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 SMCJB 
Houston TX
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For futures, thats because back adjusting contracts distorts the spread.

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  #118 (permalink)
 datahogg 
Knoxville Tennessee USA
 
Experience: Intermediate
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Trading: ES, NQ, CL, /6E futures options.
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TheDude View Post
Excellent!

Well done Josh. Get a few more of these under your belt and you'll be ready to go. Wait for a few losses to come in first though. I dont mean that in a negative way - but as we know, learning how to take a loss is key in this business.

Given the lower risk you're taking as a spread, the higher propensity for the spread to move - probably down to cyclical factors, and the lower margin, you see how spreads can be a good money machine.

FYI the 180 day correlation is 96, 30 day is 94 - some may say thats too high, but you're making money. It's best to stick to higly correlated pairs to start off - but remember I dont have too much experience trading inter commodity spreads. May be as correlation is declinig in the short term, thats where you're edge is?

Out of curiosity I wonder what a fly would look like consisting of es-nq spread against an nq-ym spread?

I have seen NQ/ES spread trades go a good % against me. Instead of taking a loss I wait a few days and the
the spread will revert and I can almost break even or with a small gain.

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  #119 (permalink)
 Cutloss 
Midway florida
 
Posts: 243 since May 2021

My favorite part is how the great spread traders lol all seem to be trading outrights whenever they can but they are clueless to trading an actual market with real moves and almost zero slippage and fees.

Efficient market theory took most of the spreaders. The same struggles in outright follow you to the pairs! I also enjoy how pairs trading firms are only around for 4 or 5 years and end up having subpar returns overall. The trade was taken by machines years ago anyway just not my thing


IN THOSE TREASURY SPREADS YOU WILL BE LUCKY TO GET MORE THAN A COUPLE DOLLARS THATS 2 BUCKS PER TRADE. THATS IT!

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  #120 (permalink)
 
SMCJB's Avatar
 SMCJB 
Houston TX
Legendary Market Wizard
 
Experience: Advanced
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Broker: Advantage Futures
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
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Cutloss View Post
My favorite part is how the great spread traders lol all seem to be trading outrights whenever they can but they are clueless to trading an actual market with real moves and almost zero slippage and fees.

Efficient market theory took most of the spreaders. The same struggles in outright follow you to the pairs! I also enjoy how pairs trading firms are only around for 4 or 5 years and end up having subpar returns overall. The trade was taken by machines years ago anyway just not my thing

IN THOSE TREASURY SPREADS YOU WILL BE LUCKY TO GET MORE THAN A COUPLE DOLLARS THATS 2 BUCKS PER TRADE. THATS IT!

Electronic Markets and Computers made spread trading a lot more difficult. A lot of the easy trades are taken by computers before anybody ever sees them.

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