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Spread / Pairs Trading - the allure and the reality


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Spread / Pairs Trading - the allure and the reality

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  #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
 
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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 
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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
 
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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
 
 
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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 
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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 
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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)
 BA 21 
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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 Yield 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. ? EOD 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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  #111 (permalink)
 josh 
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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
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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..

Sent using the futures.io mobile app

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  #113 (permalink)
 SMCJB 
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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
 
 
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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)
 BA 21 
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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..

Sent using the futures.io mobile app

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
 
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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)
 SMCJB 
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For futures, thats because back adjusting contracts distorts the spread.

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