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Question about spreads
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Created: by Revan Attachments:0

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Question about spreads

 
Trading for Fun
Brisbane, Australia
 
Trading Experience: Beginner
Platform: Sierra Chart
Broker/Data: AMP/CQG
Favorite Futures: ZF/ZN
 
Posts: 93 since Mar 2018
Thanks: 72 given, 26 received

Question about spreads

You simultaneously enter two correlated markets one long and one short..

After entry you wait for the spread to narrow or widen, depending on which market you are long/short your spread can move into your favour or against your favour.


So my questions is this, if the spread moves against your favour, why not just wait till it goes back into your favour and close the trade?

The spread is continually narrowing and widening, pushing and pulling, I mean how long would it take till the spread is in your favour again? a few hours? a few days at most? I mean.. am I missing something here?


Thank you

A spread currently in favour:
[IMG]
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Trading Apprentice
Virginia
 
Trading Experience: Intermediate
Platform: TradingView, Seasonalgo
Favorite Futures: CL,ES,GC,Spreads
 
Posts: 44 since Oct 2010
Thanks: 137 given, 37 received


I can't see your image you posted, so I'm not sure if you are talking about futures or stocks. However, the principles are the same.

Correlations are not stationary - correlations can "break" and stay broken long past your ability to fund the losses. That being said, there is a whole cottage industry of mean reversion spread traders, in both the stocks and futures domain. The stock trading is called "statistical arbitrage." Stat arb strategies can and will blow up with too much leverage and not enough true diversification.

Also, the tightly correlated markets have tight spreads, which limit your returns - especially when transaction costs are taken into account.

The following user says Thank You to drm7 for this post:
 
 
Elite Member
OC, California, USA
 
Trading Experience: Advanced
Platform: IB/TWS, NinjaTrader, thinkorswim
Favorite Futures: stocks, options, futures, VIX
 
shodson's Avatar
 
Posts: 1,904 since Jun 2009
Thanks: 499 given, 3,441 received

That's what a bunch of Ivy League PhDs and Nobel Laureates thought, and they almost took down the financial system. You can read about it...

https://www.amazon.com/When-Genius-Failed-Long-Term-Management/dp/0375758259


 



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