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I'm getting started in spread trading and am trying to learn more about it.
I've been working with John Grady's scalping methodology and really like it. The unfortunate thing, honestly, is that I often struggle to identify context as a scalper. I'm getting better, but it's still a learning curve for me.
Thinking about the NOB spread and other things got me thinking that maybe spread trading would be a better fit for me.
I found a book on Amazon by Euribor trader. It seems like a lot of spread traders use bollinger bands?
In my evolution to spread trading, I learned that indicators, indicator thinking were all bad. The reason most traders fail, or so I've been taught, is that they are looking for a magic indicator or something to automate decision maker processes.
For me, however, I've noticed that a lot of spreads have very mean reverting behavior. The NOB spread, when looked at over 15 minutes, reverts to its mean quite frequently. The YM-ES spread reverts to its mean quite frequently.
Question is, is that a viable strategy? I've also noticed the outrights do mean reversion too, so maybe this really isn't a property of the spreads anyway.
What are people's thoughts?
Can you help answer these questions from other members on NexusFi?
Hi, why now? NOB is especially dead. You are going to be waiting hours in some cases for a tick on the ICS spread and legging will have you up against the fastest in the business.
If you are plotting the ICS NOB on a chart, the reason the NOB reverts to the mean is because it resets to 0 at the beginning of every session. Also, there will be an overnight move, much of which will be taken back when large traders cover to meet margin requirements for the beginning of RTH.
The idea of mean reversion in spreads comes from the "Law of One Price" and only applies to interchangeable products/stocks. It applies to the idea of pairs trading. Within futures, this law is unlikely to apply, at least in many cases, and therefore spreads might mean revert or diverge for any number of issues. For example, if large cap stocks start outperforming small caps, you might see a divergence. You might see changes based on the dollar or exposure to world markets. You would expect it to apply in other cases though or else an arbitrage opportunity would be present -- which shouldn't happen.