Best Thread Spreads Trading

[pbylina]

I have a couple of questions:

1. Since spread trading is relying on the widening or narrowing of a spread, stop losses on each leg are not practical? Rather one should exit with a loss manually if the spread widens too much when we are betting that it will narrow?

2. What time-frames are usually used? Daily? Minute?

3. How does one find spreads? First you have to find highly correlated markets? Do you chart them both and look for divergence?

4. Do you take profits when they go back to normal? Is it called 'fair value'?

5. What is balancing legs? If I were to spread EURO vs GBP, since EURO is 12.50 and GBP is 6.25, would I use 1 euro to 2 GBP? Or since GBP moves more I would leave it at 1 to 1?

6. I was doing some research and it seems that Agricultures are heavily spread traded but FX is not. Why is this so?

7. In the picture, would I go long the top one and go short the bottom one? Is this how you find spreads, look for divergences?

 

[jaalam]

Hi All

I've set this thread up to enable anyone new to trading spreads (me included) to ask questions.

Someone has asked me what is a spreads trade. I think Joe Ross explains it better.


Free free to ask any questions here.

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[Nikhil Dogra]

Well i have read Joe Ross's book, seen few Indian spreads trade both seem to contradict each other!

Indian traders definition of bull spread is Short Near Contract and Long Far Contract!! and vice versa for bear spreads!
Its been months now and i have made 0% improvement in spreading while my outright a/c is up 34% , My patience for spreading is running quite low now, but i am posting in this forum for a last effort!!
Please recommend some good books on Spread Trading of Futures! I am giving it 3 months now , if it works fine otherwise to hell with spreading!!

 

[CraigSam]

Well i have read Joe Ross's book, seen few Indian spreads trade both seem to contradict each other!

My patience for spreading is running quite low now, but i am posting in this forum for a last effort!!
Please recommend some good books on Spread Trading of Futures! I am giving it 3 months now , if it works fine otherwise to hell with spreading!!

I subscribe to two services that provide historical research. I'm a subscriber only with no other connection:

Welcome to Moore Research Center
Seasonal FuturesCharts

There are not many books on spreads, but you can research on Amazon searching on futures and spreads. Schap is OK.

Spread trading may not be a good fit for you as most positions are open anywhere from two weeks to months, sometimes taking months to fully work out.

 

[Nikhil Dogra]

Yes you are right , its not a good fit for me. I am observing the spreads for now , I will search on amazon for books. thanks for the subscription services links.
My Position holding capacity in trading if i were to give a % would be in the region of 66% Intra day , 23% 1-3 Days and 11% above 3 days.. The maximum duration of a position in trading i held was 32 days , In Investment luckily one has crossed 5 year mark

 

[CraigSam]

I'll go ahead and post about a corn spread I just got into today: ZCZ3-ZCU3.

The spread is around -0.27 as I'm typing, and I got in today around -0.25. Seasonally, it tends to go up until roughly the end of June from early April.

The quarterly prospective crop report was released 3/28, and corn was a surprise. The spread spiked from approximately -0.33 to -0.16 then back to -0.27 over the next week or so. Each 0.01 in the spread is $50, or $500 for every ten cents per bushel (5,000 bushels in the contract).

There appeared to be a support area around -0.27 looking back about six months, but the spread had recently moved up above -0.20. I placed a limit order around -0.25 to see if I could catch a spike downwards. If it didn't spike, I wouldn't get in. I don't like to chase rising prices, preferring to catch a low on a pullback.

Given my risk tolerance, I'll get out if it gets down to -0.35 or a little lower, considering price action. My position sizing is based on a percent of my account, but I also look for other spread positions I have that may be correlated.

I would anticipate a move up to or above 0.0 based on historical patterns, and the 20-year high is around +0.20. Risk: 0.10; Reward: 0.25.

Now we watch for the next two months. Spread trading is not for those craving action unless a surprise crop report is released midway!

I haven't been able to find a non-copyright spread chart service that I can use to post a chart or I would do so. Any ideas on a non-copyright one are welcome. I use the free charts from Barchart to track positions (I have no relationship with Barchart aside from using their spread charting capabilities).

Please let me know if you've any questions or thoughts.

 

[CraigSam]

I'll go ahead and post about a corn spread I just got into today: ZCZ3-ZCU3.

Just making sure this is understood that I'm not offering any sort of investment advice or recommendation. It's just for discussion/fun purposes to illustrate my thinking for a typical seasonal spread.

 

[CraigSam]

My broker indicated I could post charts from their trading platform showing the spread, so here it is looking back over the last six months. :innocent:

 

[CraigSam]

Spread is currently at -.215.

Coming up this Friday at 11:00 CT is the monthly World Agricultural Supply and Demand Estimates (WASDE) report, a critical report to watch and likely high volatility heading into the weekend. Limit moves on either or both legs are always a possibility on those days, and there were good-sized down moves in the individual futures contracts today. However, the spread was up. :|

 

[Jack Taylor]

Hi guys I'm new to this forum & just wanted to know if everything is related to spread trades then how much minimum Spread one shall consider when approaching a broker (say specifically for EURUSD pair)?

 

[CraigSam]

Hi guys I'm new to this forum & just wanted to know if everything is related to spread trades then how much minimum Spread one shall consider when approaching a broker (say specifically for EURUSD pair)?

This is a good question as it points out a "spread" means different things to different traders. Your question is related to a different type of spread than the topic of this forum. You may want to repost your question in one of the forex forums. However, I thought it would be interesting to highlight the different kinds of "spreads."

FTSE Beater set up this forum now several years ago for spread trading defined as trading the difference in price between a long future contract and a short future. In the example trade I've been posting about, the spread is the difference between the Dec 13 corn future (say $5.36 per bushel) and the Sep 13 corn future (say $5.58 per bushel), making a spread of -.22.

I believe you're asking about a spot forex spread. I don't trade spot forex (but sometimes trade forex futures spreads which fit into spread trading since they are futures contracts!). From Investopedia (How is spread calculated when trading in the forex market?), a spot forex spread seems to be the bid/ask spread for a spot forex pair.

I realized there's at least four other "spreads" I'm aware of in trading.

There is spread betting which is also not the subject of this forum. It's legal in the UK, but not in the US. Also, from Investopedia (Spread Betting Definition | Investopedia), it appears to be a directional bet without actually owning the underlying.

There are different types of option spreads which involve long and short options with various names like butterflies and condors, calendars, box, bull put, bear call, etc.

There is also a third spread type which has multi-legged futures calendar spreads with more than two legs, such as butterfly or condor. And a fourth could be the bid/ask spread not related to forex.

I hope your trading goes well, and good luck.

 

[CraigSam]

Lightened up my correlated position for the WASDE report as I don't like the pre-report action in that spread, but left the ZNZ-ZNU spread unchanged as it appeared to be OK. We'll see in a little over three hours.

 

[CraigSam]

Sorry, meant ZCZ-ZCU spread, corn, not 10-yr bond futures, ZN. On my mind since Japanese bonds locked limit down, and ZN US futures were also down.

 

[CraigSam]

WASDE produced a lot of volatility, but essentially no change in the spread price now 5 minutes after the release. Back in to full correlated position, and back to monitoring. ☺

 

[CraigSam]

Based on the firm hold at support for the spread a couple hours after the report, I added to the position. Now we watch for the normal seasonal influences to move the spread up through June (or not as the case may be).

 

[CraigSam]

I didn't like the post-WASDE price action on Monday in my other correlated corn spread, ZCZ3-ZCN3, so got out of it completely and increased my position in ZCZ3-ZCU3. I have more confidence in the latter as it has less potential volatility. Currently, it's around -.30.

 

[CraigSam]

It's now to a critical time on Monday with the weekly crop progress report late in the day. Spread is at about -.36 at a good stop point. Depending on price action during the day, it may be time to get out. The spread headed the wrong way all day Friday based on shortages new crop versus high production old crop. The worst of all circumstances for a bear spread.

 

[CraigSam]

Vice versa from previous post and apologies: high demand old crop (through Sep) versus new crop (Dec) high yield currently forecast. Sep up, Dec down which is not good for a bear spread.

 

[CraigSam]

Out at approximately -.38. I'll do a postmortem later after the crop progress report is released in a little over 8 hours.

 

[peparak]

Hi CraigSam, good to see another spread trader I use my own tool to analyze spreads a seasonality - SeasonAlgo, you are welcome to try it, if you drop me email after registration, I'll give you free full access trial (demo is limited to corn). And you can use any chart in your posts.

btw: I'm still holding CZ-CU position, I'm very careful with grains after last year summer, so I have started with reduced position. I'm prepared to add to position around -40, almost was there.

Roman