Day Trading & Forex Forum

-oo0(GoldTrader)

Spread Charts
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TheMoneyMachine> I have never understood how one can analyze a chart, which plots the differential between the prices of two instruments.

Suppose you take a simple chart of December Gold. What is it?

What does it show?

Can you understand it?

A gold chart plots the differential between the prices of two instruments. Gold on one side, and some deteriorating currency on the other.

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As you correctly quote the spread is not a traded instrument

Of course they are, calendar spreads have their own reduced margin. You can trade them.

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and therefore does not have its own supply & demand characteristics.

A seasonal chart clearly shows the relative supply & demand characteristics, just as a gold chart does.

-oo0(GoldTrader)

Moc
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Fxmarkets> so I could look to long or short those almost as an outright ?

The best way in is to go in “market on close. So, really you are buying two naked contracts at the same time. The clearhouse will recognize the less risk and give you the lower margin, which of course leads to higher returns on margin.

There are some sets, like Meal that often favor one side during the start of a trend then favor the other side near the end. As a result you make out on both sides using less margin than one.

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that’s what I meant about seems fiddling about compared to reading an outright. purely my ignorance I know at this stage, but I assume the risk side of spreads are very attractive .

The exchanges business is risk. I imagine the risk per dollar of margin used is similar. It is just that you need a huge position in spreads to use, as much margin as outrights require.

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Needs someone here to say what the advantage of finding a spread is too.....

Just do comparisons using return on margin. That should clear it up for you.

-oo0(GoldTrader)

Insiders
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Fxmarkets> haven’t they got computers managing these trades?

Sure, but the exchanges let us have access (mrci.com), probably so they don’t get accused of insider trading. Besides they want the broad based liquidity.

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or do the spreads become too abstract which may require human discretionary decisions to over ride to out perform them?

What?

-oo0(GoldTrader)

Planets
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Charliechan> ive always struggled with ta on spread charts.

Actually the best book on this is my Ross. I use different oscillators but the games the same. Charts show relative demand for a product, spread charts show the same thing.

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ta on outrights I can understand because you can see the psychology of the traders playing out.

Same

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a spread chart doesn’t really show the psychology of the traders though does it?

Sure it does. Why not?

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it just shows a changing difference between two markets.

It is safer to trade a spread that is in the same market, corn vs. corn, beans vs. beans etc. In any case you see what you look for, like anything else. You want new planets, look and you will find more planets.[quote]I guess we could say the spread chart shows the aggregate of the psychology between the two markets/groups of traders, but if we chart the spread between 2 totally unrelated markets (like dell shares and soy bean futures), we often see the same patterns.[quote]Show me one case where over ten years you see the same patterns. If there are related you can change them. If the relation alters the risk factors the exchanges will offer you a higher return on margin to encourage liquidly.

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should ta be used on spread charts, or should we just stick to the Seasonals?

Do you mean seasonal spread charts?

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I guess going for higher highs is validation of the seasonal taking hold, but are things like support and resistance still valid?

are there still human beings on the other side of your trade?
What happened in the past?

Don’t we base all analyses in TA on reoccurring patterns in the thing we are look-in at?

I don’t study Stochastics on Silver then use it on Gold. I study it on gold for gold, then I study it on silver for silver. Similarly run it on your spread. When you feel the rhythm, trade it!

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some spreads like the crush and crack spreads are traded as 'products' in their own right - so I guess ta could be used on these.

guess so..

jxntntrader

GT:

Please, if you would, answer an unsolicited question in this unsolicited thread:

After having read read your comments about your entry signal using modified stochastics (i've resubscribed to barchart.com advanced commodities service) at elitetrade.com posts [here's the link:

http://www.elitetrader.com/vb/showth...hreadid=16982]

would you mind posting an example or 2 showing divergence of stochastics and showing an example of where you find your entry signal: I am assuming that you do not get this signal very often, correct ?

Again thanks for your help and please bear with those of us who can be classified as "newbies".

Jxntntrader

-oo0(GoldTrader)

Stochastics
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Here are a few charts, I am much better at these things in real time.

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Originally Posted by jxntntrader would you mind posting an example or 2 showing divergence of Stochastics and showing an example of where you find your entry signal?

I am keeping an eye on Euro$ which seem to be trading counter seasonal right now. Email-me and I will send you copies of letters I exchange with traders that should clarify things a bit.

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GoldTrader> I will put on the largest positions when Stochastics

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turns up, %K on the right hand side with a bullish divergence from below 15 the week prior to a Seasonal window opening. Any turn up from a terminal area near a seasonal window opening bears inspection.The Only valid signal is divergence.

You have to remember that Stochastics cannot be used alone. When you can read chart patterns like Andy, you will not need oscillators at all. Before I am going to act on a Stochastic divergence from a terminal area, I like to see Parabolic or trendlines break, around the time a cycle is due.

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I am assuming that you do not get this signal very often, correct.

Gee I had not thought about that, I guess there is always some sort of signal...its just that on the best ones you can run a larger position size.

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charliechan

hi gold trader - thanks for your thoughts on the subject.

my thinking was more along the following lines....

suppose we have a spread chart of x-y.

the spread chart may be going up, even if nobody takes a position on the x-y spread, as we are only looking at the differential. so there is no actual demand for the spread, only the outrights.

in fact, there may not even be any demand anywhere. as andy pointed out, the y (the short leg) may be selling off strongly, where as x (the long leg) may just be moving sideways - yet still the differential is increasing, so x-y appears to be moving up. there is no demand anywhere - not even in the outrights, yet still the spread chart is moving up. this is because the spread chart is A DERIVATIVE OF 2 DERIVATIVES. this is similar to how an option can increase in value with no demand in the option or the future/stock, just a change in volatility!

i guess this is all academic. making money is always the main concern, but its often educational to see others perspective on these issues. and may be get something that i have overlooked

__________________
hope is not a strategy

-oo0(GoldTrader)

I owe you’s
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Of course, completely

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Originally Posted by charliechan suppose we have a spread chart. The spread chart may be going up, even if nobody takes a position on the spread, as we are only looking at the differential. so there is no actual demand for the spread, only the outrights.

Demand for the spread itself means nothing. It’s the demand for the commodities and how that affects value, that all of this reflects. Is the world still hungry?

Will they be eating this product when it’s harvested?

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in fact, there may not even be demand.

Are you talking about negative demand?

Just as money can be accounted for in positive and negative numbers, I don’t see why charts cannot represent positive and negative demand for products in the future. Ok we are getting off into the hitchhikers galaxies with this, but, ultimately the market moves things into and out of storage, we as spread traders earn a premium to lubricate the transactions with our trading.

Look, I am just going to call them commodities because time is a commodity and time figures into all futures speculations. If demand is there to pull a commodity (thing, product, interest rate sensitive security, etc), out of storage we could call that positive current demand. When the market prices push commodities into storage that is negative current demand.

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the (the short leg) may be selling off strongly, where as (the long leg) may just be moving sideways - yet still the differential is increasing, so x-y appears to be moving up.

How far do you want to take this?

Suppose this was Gold, “the (currency) may be selling off strongly, where as the (product) may just be moving sideways - yet still the differential is increasing, so (the price of Gold), appears to be moving up.

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there is no demand anywhere - not even in the outrights, yet still the spread chart is moving up.

Yah! So! My account value is going up, even though the gold is staying the same and the currency is falling. Isn’t that what we expect?

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this is because the spread chart is A DERIVATIVE OF 2 DERIVATIVES.

Which are derivatives of derivatives on and on. Suppose you are trading Gold. You are not really trading gold. You do not take it down to the Goldsmith and hand it to him, and pick it up, like in days of old. No, even then you would have handled receipts, IOU’s (I owe you’s), signed documents acknowledging debt, something representing but not the actual thing itself, a “derivative,” of value.

What’s behind it all is probably some elusive thing deriving values from an unknown, underlying variable asset, which may or may not be purchased in the future. Even cash is a derivative of something unspecified. Do you want values “derived from something else,” moving into or out of your net worth is the question?

Everything is an IOU, everything traded is a derivative of a derivative!