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Spread / Pairs Trading - the allure and the reality
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Spread / Pairs Trading - the allure and the reality

  #51 (permalink)
Trading for Profit
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kevinkdog View Post
Before you get too excited, realize there are no stops, to trade each spread would take a significant amount of capital, and that some of their trades have the wrong ratios.

Hi Kevin,

thanks.

What do you mean by "wrong ratios"?

Cheers,
k

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  #52 (permalink)
Market Wizard
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karoshiman View Post
Hi Kevin,

thanks.

What do you mean by "wrong ratios"?

Cheers,
k

For some intermarket spreads, the correct ratio (the ratio that the exchange lists for margin) is not one to one. For example, MRCI lists the USTY spread as 1:1. This NOB spread is usually not 1:1 Unveiling the Mysteriousness of NOB Spreads | RJO Futures

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  #53 (permalink)
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josh View Post
So, you take a trade, not really because you want to express an opinion about what might happen, but because you see an opportunity, and want to exploit or seize that opportunity. I don't know if it would be going too far to say that something has to happen; maybe you could say that there is a catalyst that must occur that makes the opportunity something you want to act on. Either way, you are taking the trade because the opportunity for profit exists, not simply because you have an opinion and want to risk money to see if you are right. I think the distinction is important that you have made, if this is indeed the distinction.

Yes @josh, it is.

it goes right to the heart of the decision making process.

in a perfect world, where we are perfect;

we would always employ logic and unbiased heuristics in our decision making,

and not allow stress, cognitive load, and emotions to non-linearly affect the process,

the real holy grail as it pertains to trading.

so, its not so much a catalyst,

as a consilience, or a convergence of uncorrelated signals,

that provides a strong conclusion.


Last edited by tigertrader; September 22nd, 2013 at 01:08 PM.
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  #54 (permalink)
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I know a few full time prop spread traders, trading US Treasuries/Eurex interest rates. They are trading the yield curve.

My understanding is that the most attractive thing about this sort of spread is the way the spread works when the trade is not in your favor.

In laymans terms, the trade will become profitable faster as it moves your way but lose money more slowly when it moves against. As has been said, it is still effectively a directional trade but the direction of the yield curve.

Trading 2 correlated stocks that have gone out of synch is statistical arbitrage and that is what I generally think of when I hear about pairs trading. To me, that seems more of a high frequency game than yield curve trading but on stocks I am sure there's plenty of pairs that can be arbed without being an HFT guy. I think there's a fundamental aspect to pairs trading stocks in terms of figuring out if the divergence is because of a change in the underlying fundamentals or not.

Then there's calendar spreads which might involve you doing zany things like actually storing a bunch of oil for 3 months to take advantage of a pricing disparity.

Then crack spreads that trades off oil/gas against their derivative products.

I am sure it is very difficult to do a generic analysis of pairs trading because there's a lot of different spreads out there and they all have different characteristics, you'd need to become quite familiar with them to form an educated generic opinion. It is something I want to look into more but with so much on my plate, it never really gets priority.

From what I have seen, the prop traders that lean towards spread trading tend to get onto a funded account in less time than those that stick to outrights. If I wasn't so lazy

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  #55 (permalink)
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Good Tutorial On "Crack" Spreads

I'd "crack" a joke about trading the "crack", but it just seems... too easy a target !



Inside the Oil Markets | Analysis Concepts | TradeStation Labs

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  #56 (permalink)
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As a quick update--the sim trade initiated here is currently in profit $2740.

NQ profit = (3222.50 - 3160.80) * 4 * $20 = + $4936
ES loss = (1690 - 1704.50) * 3 * $50 = - $2175

Net profit = $4936 - $2175 - comms ~= + $2740

The DJIA has been so weak relatively that a short there instead of ES would actually almost be yielding a profit, or at least breaking even, so you'd have an NQ long free and clear for a $4900 profit.

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  #57 (permalink)
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tigertrader View Post
I'd "crack" a joke about trading the "crack", but it just seems... too easy a target !



Inside the Oil Markets | Analysis Concepts | TradeStation Labs

Indeed...

As if the guy that invented the term "crack spread" didn't realize the double entendre he'd created!

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  #58 (permalink)
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DionysusToast View Post
Indeed...

As if the guy that invented the term "crack spread" didn't realize the double entendre he'd created!

I believe he was also responsible for coining the expression "Splitting Hairs"...........

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  #59 (permalink)
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ES/NQ sim trade is now +$3600.

+$3800 on the NQ long, and only -$200 on the ES short. The cool part is that I'm not worried about being stopped out unless a dollar loss is reached. Kind of like, "go ahead, run the stops, I don't have one."


Last edited by josh; September 24th, 2013 at 11:05 AM.
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  #60 (permalink)
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ES/NQ sim trade is now $5800 in profit.

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The ES leg is actually in profit, with NQ staying very strong. First circle is the spread where the trade was entered, second is current. A two week sim trade may not be too exciting for some people, but this has demonstrated how the trade works at least, which was the only purpose.

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