Andy's Spread Trading Thread

[Jordan_Andy]

ok, now what specific market is that and what futures please....

now reading it the spread widened between the 2 to -23000 took out 22,000 the spread rallied or then narrowed 10% from low to -21000

hehe whats my buy and sell and risk ? could you get long or look to long that spread on the failure at -23000.

I might need a simplified complete break down. i see the chart spread widening and narrowing, but how many points risk and profit was it ,that low to current?

I may have to, depending on your reply mate , have to research a very basic primer .

I can see the trends, just the technical detail I know nothing of.

cheers

fx.

What you see above is called an "Equity Spread". The problem with the spread above is the following:

One unit move in FC is $500 and one unit move in LC is $400. This is a problem because you can not look at LC-FC, you would get wrong numbers.

What you can do is the following. You multiply each side with the right value (LC with 400 and FC with 500) and you get a chart where you can see the moves in US$. (for more details just send me a short email. I got an PDF which explains it better).

This means, if the spread moves from -23k to -21k it is moving up 2k in US$.

Equity spreads are easy to read because you always see US$ on the chart itself.

If you look at a "normal" spread in the form of A - B you always have to calculate your profit/loss.

Andy

 

[Jordan_Andy]

so I could look to long or short those almost as an outright ? thats 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 .

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

Most spreads are trading at a "spread pit" as a seperate market. Of course the outright and the spread markets are related otherwiese the guys at the pits would take advantage of it. You will be surprised how many proffessional trader are spread trader especially at the exchanges.

When you want to enter a spread (or exit) you can do it by buying and selling in the outright markets or you can do it in the spread market via spread order (only market, limit, or better orders are allowed for spread orders).

Happy trading

Andy

 

[fxmarkets]

cheers andy, i'll send you and email, for the pdf. you mentioned.


Fx.

 

[Jordan_Andy]

Free PDF's about Spread Trading!

If anyone else need the free spread stuff just send me a short email ([email protected]). It's really just basic stuff but good to know for the ones new to spreads.

Andy

 

[TheMoneyMachine]

ive always struggled with ta on spread charts.

ta on outrights i can understand because you can see the psychology of the traders playing out. a spread chart doesnt really show the psychology of the traders though does it? it just shows a changing difference between two markets.

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.

should ta be used on spread charts, or should we just stick to the seasonals? i guess going for higher highs is validation of the seasonal taking hold, but are things like support and resistance still valid?

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.

have i lost it totally?

anyone agree or disagree?

I totally agree charliechan, i have never understood how one can analyse a chart which plots the differential between the price of two instruments. As you correctly quote the spread is not a traded instrument (excluding spread instruments) and therefore does not have its own supply & demand characteristics (directly).

Maybe Andy will enlighten us?!

Regards

TMM

 

[charliechan]

I am personaly using really basic stuff for my chart reading. Resistance, support, trends, up and down chanels...I guess thats pretty much it. You will be surprised what you find in the spread charts. To me spread charts are much easier to read as outright futures charts. Well, normaly a spread chart is a line chart and therefore easier to read anyway.

Spreads have one big advantage: trends can last much longer then in todays outright futures markets.

I will show you on different examples what I mean of course.

happy trading

Andy

thanks andy - i think the keep it simple principal is the best too.

i read about applying ta to spread charts in courtney smiths book - which kind of prompted my post. seasonals + basic chart observation (support, resistance & trends) seems common sense and a logical way forward.

ive noticed gold trader likes to add ta indicators. perhaps he has something to add that i am missing.

 

[charliechan]

I totally agree charliechan, i have never understood how one can analyse a chart which plots the differential between the price of two instruments. As you correctly quote the spread is not a traded instrument (excluding spread instruments) and therefore does not have its own supply & demand characteristics (directly).

Maybe Andy will enlighten us?!

Regards

TMM

if you take a chart of 100 coin flips (tick up for heads, tick down for tails) you get to see many of the traditional ta patterns like head & shoulders etc. this to me brings into question the validity of ta patterns on any chart - outrights, spreads, coin toss, etc.

this is why i think its better to use simple stuff like andy has mentioned - you cant deny a trend is a trend and non random, but the other stuff could well be random - such as h&s, wedge etc. we want to make money based on high probability outcomes - not random ones! addiction to random rewards is something mark douglas touches on. it can be crippling.

the seasonality also lends a lot of weight to a non-random trend.

as for the demand and supply, i think weve got to change our mindset a bit. its not so much the demand and supply of the spread we are trading, but the differential in demand and supply between the individual components. in winter, there is more of a demand for heating oil futures than summer contracts - so the differential between the two increases, creating a 'trend'

we could say that because the spread is moving up, there is demand for the spread, but if you were to swap positions on the legs (sell winter, buy summer heating oil), the spread chart would be moving down - same contracts, but now it looks like there is more supply. the truth is that demand and supply doesnt come into the spread, only the legs. but we are not trading the legs, but the differential.

 

[TheMoneyMachine]

if you take a chart of 100 coin flips (tick up for heads, tick down for tails) you get to see many of the traditional ta patterns like head & shoulders etc. this to me brings into question the validity of ta patterns on any chart - outrights, spreads, coin toss, etc.

this is why i think its better to use simple stuff like andy has mentioned - you cant deny a trend is a trend and non random, but the other stuff could well be random - such as h&s, wedge etc. we want to make money based on high probability outcomes - not random ones! addiction to random rewards is something mark douglas touches on. it can be crippling.

the seasonality also lends a lot of weight to a non-random trend.

as for the demand and supply, i think weve got to change our mindset a bit. its not so much the demand and supply of the spread we are trading, but the differential in demand and supply between the individual components. in winter, there is more of a demand for heating oil futures than summer contracts - so the differential between the two increases, creating a 'trend'

we could say that because the spread is moving up, there is demand for the spread, but if you were to swap positions on the legs (sell winter, buy summer heating oil), the spread chart would be moving down - same contracts, but now it looks like there is more supply. the truth is that demand and supply doesnt come into the spread, only the legs. but we are not trading the legs, but the differential.

I understand your perspective but i still cant grasp how a spread chart (solely) has any predictive quality's. The spread is dictated by the supply & demand functions of 2 different instruments, and each has its own supply & demand characteristics which are unique.

I find most concepts difficult to grasp so please bear with me!!

Regards

TMM

 

[Jordan_Andy]

thanks andy - i think the keep it simple principal is the best too.

i read about applying ta to spread charts in courtney smiths book - which kind of prompted my post. seasonals + basic chart observation (support, resistance & trends) seems common sense and a logical way forward.

ive noticed gold trader likes to add ta indicators. perhaps he has something to add that i am missing.

I also like the book from Courtney Smith a lot...highly recommended for spread trader.

Andy

 

[Jordan_Andy]

I understand your perspective but i still cant grasp how a spread chart (solely) has any predictive quality's. The spread is dictated by the supply & demand functions of 2 different instruments, and each has its own supply & demand characteristics which are unique.

I find most concepts difficult to grasp so please bear with me!!

Regards

TMM

I agree with Charlie in what he says above.

Maybe we should seperate the spreads into two groups. Spreads where both sides are related (corn - corn spread for example) and spreads where both sides are not related (corn - emini s&p ).

A spread trader normaly is interested in spreading related contracts. Sometimes they are highly related (corn-corn) and sometimes they are related but not so much (hogs - cattle).

Because of this realation to each other a spread is not completely random (only as random as the outrights themself). If March corn crashes down probably May will do the same.

Resistance and support in the outrights will reflect also in the spread (not always of course).

The advantage of a spread is we only care about the difference itself and not about the both contracts. Very often you will find the following situation:

outright A moves sideways, outright B moves sideways, spread A - B moves up in a nice trend (will get some examples later).

A spread can move even when both underlying markets are going nowhere.

Andy

 

[Jordan_Andy]

Spread is trending, outrights don't trend

Hi Guys,

as prommissed an example of a trending spread, where both legs are going mainly sideways. Below you can see KWH6 - WH6. As you can see the spread did start its up trend mid of July 2005. The trend did end around mid of November 2005.

Now we look at both outright futures KWH6 and WH6 and we see both are trading pretty much up and down at the same time.

Of course this is an example with a very long trend in the spread (over 4 month). I just did want to give a nice example where everyone see it is not so important what happens in the outrights as long as the spread is moving into the right direction.

Additional I want to show you the seasonal chart of the spread to show you the spread did actually what it was supposed (according to seasonality) to do.

 

[apples10]

Hi Guys,

as prommissed an example of a trending spread, where both legs are going mainly sideways. Below you can see KWH6 - WH6. As you can see the spread did start its up trend mid of July 2005. The trend did end around mid of November 2005.

Now we look at both outright futures KWH6 and WH6 and we see both are trading pretty much up and down at the same time.

Of course this is an example with a very long trend in the spread (over 4 month). I just did want to give a nice example where everyone see it is not so important what happens in the outrights as long as the spread is moving into the right direction.

Additional I want to show you the seasonal chart of the spread to show you the spread did actually what it was supposed (according to seasonality) to do.

sorry, i'm a bit confused - are you recommending this trade now?

why are the charts only up to november?

rgds

 

[Jordan_Andy]

Apples, this was just meant to be an example.

Would have been a good idea to enter mid of last year. No recommendation to enter right now.

Andy

 

[Jordan_Andy]

Possible Trade

I am sorry guys but I have been traveling and could not find the time for trading.

But I looked thru the seasonal charts and maybe you like the following idea:

I am looking at long June06 Live Cattle and short August06 Live Cattle. The seasonal chart shows a nice seasonal move beginning Mid-February till beginning of March. It looks to me it would be possible to enter on a nice up move. Stop could be around 0.3 (on close only). I personaly would go for a first target of about $300 and then use a trailing stop.

Well, let's see what we get.

Happy trading,
Andy

 

[Jordan_Andy]

June06 Live Cattle and short August06 Live Cattle is gong the wrong way. No entry so far. Regarding to my entry rules I skip it for the moment but keep on watching it.

Andy

 

[jxntntrader]

June06 Live Cattle and short August06 Live Cattle is gong the wrong way. No entry so far. Regarding to my entry rules I skip it for the moment but keep on watching it.

Andy

What is your opinion of an entry at this point to go Long Aug. 06 LC/ Short June 06 LC ... see MRCI #2627 ??

 

[Jordan_Andy]

What is your opinion of an entry at this point to go Long Aug. 06 LC/ Short June 06 LC ... see MRCI #2627 ??

To be honest jxctntrader, I don't know what to do with this one right now. There are two moves in the oposite direction in the next 2 weeks. I would probably wait till I get a better picture.

Andy

 

[Paulds11]

Tag Jordon

I was interested in finding out more about the platforms you believe best suit Spreads and also if you have traded any new spreads you have devised yourself? Also do you modify your spreads also with Options?

cheers

Paul
(Gradually realising that SPREADS are the way to go)

 

[Jordan_Andy]

Hi Paul,

you don't need anything special for the spread trading. As long as you can chart spread it will be fine. No indicators or other stuff is required. End of day data is fine, or delayed.

Yes, I have traded a lot of new spreads, but I just don't find the time to post my trades anymore.

I have never used any options for my trading so far. I have no idea how to trade them.

Best regards,
Andy

 

[Paulds11]

Jordan-Andy

Thanks for the heads up
More questions though:

Isnt it possible to scalp trades from spreads intra-day or is the movement in general insufficient.. ? Im just trying to get some feeling for the strength of movement in spreads and the dynamic nature of that movement intra-day

If you are in a trade and it moves against you in the opposite direction, I assume the way to rever the trade is first to exit the position via both legs, and then to establish the same spread and ratio in reverse ie simply reverse the buy/sell portion of each particular leg.. correct?

Are the fundamentals that move Futures prices relatively similar to diseminate and analyze as stock prices are? e.g. war or unrest could boost the price of energy futures in the same way stocks prices are boosted on good company news relating to growth and earnings? or is the Futures unusually idiosyncratic so as to make such comparison unwarranted?