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How should I set up my platform for spread trading?


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How should I set up my platform for spread trading?

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  #1 (permalink)
Brisbane, Australia
 
 
Posts: 95 since Mar 2018
Thanks: 72 given, 26 received

Hello

I have no idea what I should be looking at to trade spreads, I think I want to be looking at a chart that features both markets in some sort of line chart?

And how would I set them i.e. from what reference point in time/price? any indicators etc? I don't know where to start at this point, and it is a complex task.


Got any fundamental tips to point me in the right direction?

Edit: I googled spread chart and got this, this look to me like the spread of two correlated markets, but from what point in time are the two referenced and how would I set it up? kinda tricky.

https://imgur.com/u2f3a2j

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  #3 (permalink)
Brisbane, Australia
 
 
Posts: 95 since Mar 2018
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Okay so obviously you would want a chart with the two symbols overlaid to view support and resistance pulling and pushing the spread wider and narrower but where the heck are the two markets typically referenced from? i.e. what point?

Hmm, no replies yet, probably all these people thinking they will lose their edge by revealing, you won't lose edge when in fact people would be pushing the market in your favour imo.

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  #4 (permalink)
Hartford CT, USA
 
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Revan View Post
Okay so obviously you would want a chart with the two symbols overlaid to view support and resistance pulling and pushing the spread wider and narrower but where the heck are the two markets typically referenced from? i.e. what point?

Hmm, no replies yet, probably all these people thinking they will lose their edge by revealing, you won't lose edge when in fact people would be pushing the market in your favour imo.

I don't think it has anything to do with revealing an edge. I think that there isn't a whole lot of folks trading spreads compared to outrights on FIO. Also, this is the type of topic that you'll find the best info has already been offered and can be researched by googling. Search for the threads on FIO that discuss spread charts, there's some very knowledgable contributions to be found. It's not the easiest thing to find info on, but it is there.

But to your question, AFAIK, overlaying the symbols wouldn't be your "go to" chart type used in spread trading.

Each program does it differently, but for arbitrary spread charting, you're usually looking at charting an arithmetic funciton or ratio of two different symbols' price series, it can be as simple as "symbol A minus symbol B." More complex for different spreading strategies such as butterflies, or if you are weighting one symbol differently vs another to match their monetary (hedging) value.

Other than that, the exchanges offer native spreads. These have their own special symbology to access data feeds for you to chart with and trade with. They have reduced margins and they completely remove the execution complexity of spread trading. Sierra Chart does allow trading of native futures spreads.

Here's one good thread, but I seem to remember others, so you might locate them if you google or use the search feature at the top.

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  #5 (permalink)
Brisbane, Australia
 
 
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ocpb View Post

But to your question, AFAIK, overlaying the symbols wouldn't be your "go to" chart type used in spread trading.

Each program does it differently, but for arbitrary spread charting, you're usually looking at charting an arithmetic funciton or ratio of two different symbols' price series, it can be as simple as "symbol A minus symbol B."

Other than that, the exchanges offer native spreads. These have their own special symbology to access data feeds for you to chart with and trade with.

Is the exchange spread data typically symbol A minus symbol B?


i.e. how can I tell the spread is widening?

how can I tell the spread is narrowing

How can I tell the spread is inverting?


If I understood those three things then I would probably understand how to read a spread chart.. I have a few ideas on how it would work but I don't want to mention them just in case I'm wrong to avoid further confusion.

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  #6 (permalink)
Arnhem, The Netherlands
 
Experience: Intermediate
Platform: NinjaTrader, Zorro
Broker: RCG/Continuum, IB, Oanda
Trading: Futures: FDAX, GC, ES, CL also: FX, CFD, ETF
 
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Posts: 72 since Aug 2012
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Tradingview.com pro has the option where you can use different instruments in any formula: like A-B (pair spread) or A/B (ratio) and use it as it is one instrument. All indicators work just like you would expect.

Other professional platforms (expensive) have excellent spread possibilities like CQG spreader. On NT you need some extra custom indicators to plot the pair as 1 instrument in a candlestick fashion. Is doable but not ideal. I don't know what the support is for synthetic (self-made) pairs on other retail platforms.

The edge for pair trading is not about the algo. The algo is mostly a mean reverting algo like z-Score or Bollinger Bands algo or something more sophisticated. Just search "mean reverting trading method" and you will get some examples.

Pair trading is more about selecting the right pairs. Lot of quant methods available like Dickey Fuller test or Johansen test for testing mean reverting characteristics of the pair in the past. Some other less sientific tests: counting crossings of the average, and my favorite: just eyeballing.

But synthetic pair trading is not simple: especially when you have 1 or more illiquid instruments. Getting in/out with minimal slippage is a challenge.

Also more trading costs, and margin especially when the trades need overnight exposure. Which happen a lot in my case. For some pairs you will get reduced margin requirements at the exchange like the us 2 year vs the 5 year treasury note at the CME.



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  #7 (permalink)
Arnhem, The Netherlands
 
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Other term for pair trading is statical arbitrage (statarb). You can look it up.

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  #8 (permalink)
Bay Area California
 
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Revan View Post
Is the exchange spread data typically symbol A minus symbol B?


i.e. how can I tell the spread is widening?

how can I tell the spread is narrowing

How can I tell the spread is inverting?


If I understood those three things then I would probably understand how to read a spread chart.. I have a few ideas on how it would work but I don't want to mention them just in case I'm wrong to avoid further confusion.

Exchange spreads are typically A-B but there are exceptions for products with different ratios or tick values.

You wont find standard nomenclature for a lot of these things, but for me:

the spread is widening if it is moving away from zero (in either a positive or negative direction). Narrowing if it is moving closer to zero.

A spread is inverting if it normally trades above zero and moves below zero (or vice versa).

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  #9 (permalink)
Brisbane, Australia
 
 
Posts: 95 since Mar 2018
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addchild View Post
Exchange spreads are typically A-B but there are exceptions for products with different ratios or tick values.

You wont find standard nomenclature for a lot of these things, but for me:

the spread is widening if it is moving away from zero (in either a positive or negative direction). Narrowing if it is moving closer to zero.

A spread is inverting if it normally trades above zero and moves below zero (or vice versa).


That's what I thought was the case..

So pretty much when the line is significantly higher or lower than the majority of the overall traded places that's probably an indicator it will narrow again.. well then here goes nothing.


With that said it's pretty much just looking for support and resistance, practically no different to any outright chart.

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  #10 (permalink)
NYC, NY
 
Experience: Intermediate
Platform: Sierra Qtrader TT
Broker: Amp/CQG/TT, Optimus, ADM
Trading: Mainly CL. Spread researcher currently
 
Posts: 610 since May 2013
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What is your platform? And who is your data provider? The symbols for exchange spreads depending on data provider. Also u want to make sure your brokerage supports this to get SPAN margin relief


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