Trading Spreads - is anyone actually doing it?

[monarch]

Hi All

I am looking at trading spreads and wondered if any one in th UK was doing it and what are the practicalities on trading from the UK.

My questions are:

Most sites, info etc is relative to to the US markets, does anyone trade using spreads in the US and if so how do you get prices, orders filled etc. Do you have brokers that understand you are spreading and therefore set lower margins?
Is it practical?

Is there any market in UK for trading spreads?

Has anyone got a recommended route to get going or book as a guide. (looking at Joe Ross's book but has mixed reviews)

I am sorry if this is a bit or a ramble but any help would be appreciated.
Advice from someone who is actually doing it is better than all the books!

thanks

 

[H2O]

Spreads

I trade spreads.
Not from the UK but from the mainland. There are several brokers taht will give you lower margins (if the spread is accepted by the exchange).

I know that for electronic traded futures IB will work with spread margins. They don't offer non-electronic futures, so if you're looking for those you'll have to go somewhere else. (Refco or so)

Good books (IMO)
- Trading Spreads and Seasonals (Joe Ross)
- Spread Trading the complete guide (Courtney Smith)
- The elements of pairs trading (Douglas Ehrman) - more focus on stocks but very usable for futures as well.

Hope this helps

 

[Beach Runner]

H20,
I was interested to see the Douglas Ehrman title as I haven't come across it.

monarch,
Another interesting book (IMO) is Spread Trading by Howard Abell. For some reason it does not seem to be available in the UK (when last I looked) but can be bought from Traders Press in the US.

 

[rog1111]

For a start, try futuresource.com for useful charts.

GL
rog1111

 

[Bunyip]

I trade spreads on commodity futures in the US. I use Refco Express to place the orders (although this is not an electronic order book - all orders go to the pits), who will give reduced margins. I get prices from eSignal and Futuresource (although I think they are being taken over by eSignal).

It is very easy to trade spreads from the UK - you can use end of day or beginning of day to place orders (most pits open about 3 - 3.30pm and close about 7pm).

The Courtney-Smith book and the Howard Abell book provide a good starting point. Refco have a broker service which will help you place orders (which can be difficult if you are using limit orders).

Hope this helps.

 

[monarch]

Great help

Thanks everyone great help.

I have ordered the books by Courtney Smith & George Angell from the US.
I wondered how H20 found the Joe Ross books? Its a lot of money if it doesn't offer anymore than the other books.

Its nice to know it possible to trade from th UK.

Once again thanks for your help.
Any other suggestions always welcome.

Nick

 

[fastnet]

Hi monarch -

I wonder if you could list the benefits of spread-trading as you see them?

Given the added operational problems (limited brokers, risk of legging in/out, etc) what are the main advantages that compensate for such draw-backs.

JR has, once again, written a very convincing sales letter for his book on spread trading. However do spreads REALLY trend more than the outright contract? Also I don't understand why the margin ratio is so much better or the risk any less than a conventional directional trade. The margin required might be a fraction of that required usually but because you're also making an equal and opposite trade the actual number of contracts will have to be so much larger to achieve the same risk/reward.

Could you shed any light?

Bunyip - since you already trade spreads I wonder whether you would be able to comment on the relative advantages?

Thanks in advance - FN

 

[fastnet]

BTW - although I hate to plug content ''on the other side'' maybe those reading this thread will have an interest in ''Andy's Spread Trading Journal'' which can be found on the ''elitetrader.com'' site.

(according to the intro at least) This guy iwas taught by JR himself and now trades spreads and Ross Hooks/1-2-3 set ups from the Carribean

 

[H2O]

H20,
I was interested to see the Douglas Ehrman title as I haven't come across it.

monarch,
Another interesting book (IMO) is Spread Trading by Howard Abell. For some reason it does not seem to be available in the UK (when last I looked) but can be bought from Traders Press in the US.

I will look at this book as well. I buy most of my books from Amazon (US) or Traders Press.
In fact the founder of Traders Press is a spread trader himself.

 

[H2O]

Thanks everyone great help.

I have ordered the books by Courtney Smith & George Angell from the US.
I wondered how H20 found the Joe Ross books? Its a lot of money if it doesn't offer anymore than the other books.

Its nice to know it possible to trade from th UK.

Once again thanks for your help.
Any other suggestions always welcome.

Nick

IMO it's a good book, although it's expensive.
I prefer these educational costs over trading losses, so if you see them like that, it's not a lot of money.

 

[Bunyip]

Fastnet,

Some of the advantages of trading spreads:

- Lower margin requirements, meaning that you can trade commodity futures on a smaller account than if you are taking a directional bias.
- Lower risk than trading only one side (ie: by buy and selling to create a spread, you are generally protected from lock limit days and violent moves against you which maybe difficult to get out of in a hurry. Commodity future spreads, as I understand it, are tradeable even if one of the contracts has gone lock limit, as long as the spread is recognised in the pits).
- Much of the volatility is taken out of the trade, which is why spreads tend to trend for a while. Spread trading is effectively trading an increasing difference in rate of change of the contract prices. There are seasonal and other factors which cause one contract month to move at a different rate than another.

As far as trading commodity future spreads and some financials (such as Eurodollar) it is better to trade them through a broker who can deal with spreads, rather than trying to leg into a position. Legging in increases your risk - if you enter the spread as a spread (with a limit) it doesn't matter what the individual contracts are priced at, you are only concerned with the differential. For electronically traded contracts this would be less of an issue, but is a major factor if you are dealing with pit traded commodity futures.

The Andy that you mention in a post above, sounds like Andy Jordan who works for Trading Educators (Joe Ross' company), who lives in the Carribean. I have been on Joe Ross' spread trading seminar which is a good way to begin trading spreads. I have his book, but have not read it yet, although the content, I have been told, differs from the seminar.

 

[fastnet]

Thanks Bunyip and all understood.

However it does not address the question of the much larger position size required to achieve the same exposure to a movement - even if this movement were based on the differential rather than the outright move.

Although the margin requirements are smaller you would only be taking a relatively smaller position - ie risk/reward unchanged.

The only advantage I can imagine is IF the differentials between contracts do in fact trend for longer and in a less volatile way than the underlying contracts.

Also if there are known seasonal effects then surely this would already be factored into the price (of the spread) and not provide an 'edge' as JR seems to suggest.

I am sorry to be cynical but I can't help feeling that the emphasis in spread-trading is just a sales tactic to tap into existing traders and offer them the 'secrets' of this much less well known form of trading. The implied message is that there is a little known alternative form of trading used only by ''insiders'' which will put you streets ahead of the regular trader. This sort of message will always appeal.

So far I have seen no evidence of the reduced risk or smooter trends.

Please don't take this personally - it's certainly not meant to be. I have spent a lot of time thinking about the claims made by JR and just can't see how they are substantiated.

FN

 

[Beach Runner]

Hi fastnet,

Just one point you mention on risk:

So far I have seen no evidence of the reduced risk

I write this not from vast experience here, but: it is a lot safer to hold a spread trade position overnight than to hold an outright and I think that is a reduction in risk. I know both contracts in the spread could go against you but most of the time I think you are a lot safer - and possibly could sleep!

 

[fastnet]

Aye - agreed. But only with reduced exposure to potential reward.

Spread trading claims to give lower risk with the same potential for reward as traditional methods. I just don't see it.

FN

 

[Bunyip]

Thanks Bunyip and all understood.

However it does not address the question of the much larger position size required to achieve the same exposure to a movement - even if this movement were based on the differential rather than the outright move.

Although the margin requirements are smaller you would only be taking a relatively smaller position - ie risk/reward unchanged.

The only advantage I can imagine is IF the differentials between contracts do in fact trend for longer and in a less volatile way than the underlying contracts.

Also if there are known seasonal effects then surely this would already be factored into the price (of the spread) and not provide an 'edge' as JR seems to suggest.

I am sorry to be cynical but I can't help feeling that the emphasis in spread-trading is just a sales tactic to tap into existing traders and offer them the 'secrets' of this much less well known form of trading. The implied message is that there is a little known alternative form of trading used only by ''insiders'' which will put you streets ahead of the regular trader. This sort of message will always appeal.

So far I have seen no evidence of the reduced risk or smooter trends.

Please don't take this personally - it's certainly not meant to be. I have spent a lot of time thinking about the claims made by JR and just can't see how they are substantiated.

FN

Fastnet,

I think that you have clearly identified the main benefits (aside from risk reduction) - the spreads tend to move with less volatility (particularly intramarket spreads) and tend to trend for longer (I believe). It is not the road to instant riches, but is a method for consistently taking an income from the market. It is a fairly relaxed (boring) way of trading.

Interestingly, JR's comment about spread trading being used by "insiders" is re-iterated by Dr Alexander Elder in his book "Come into my trading room" (p207-08).

 

[fastnet]

Okay - thanks Bunyip. Most of the trading sages frown on any sort of excitement from trading . . . . I suppose this is an emotion more akin to gambling.

I don't see that your risk is reduced. The spreads might well trend more readily and for longer - I wouldn't know how to set about proving or dis-proving this point. However as far as risk isn concerned there WILL be less volatility because one contract will cancel the other other out to a great extent. Of course the extent to which they do not cancel each other out is your loss or gain.

However, because of this in-built hedge the position you must take would have to be MUCH bigger in either side of a spread trade than a single directional contract alone to achieve the same risk/reward. This is why brokers allow you to place lower ,margined trades - because the risk is reduced and so is their exposure to client default etc.

This aint no panacea as far as I can see. IF the spreads do trend longer and more often then there might be something to it. However , as far as placing trades is concerned you need to beef up positions if you want the same exposure to risk (which is what the market rewards, or punishes, after all).

I'm not writing this off - simply pointing out that one of the main advantages - well, isn't.
Cheers

FN

 

[Pobtastic]

It is not the road to instant riches, but is a method for consistently taking an income from the market. It is a fairly relaxed (boring) way of trading.

I fail to see how trading spreads is boring? I trade between 500-3000 (usually around 1000) round trips a day - that's hardly boring?!!! And yes they *are* a safer way of trading, but only if you know what you're doing in the first place. I actually can't remember the last time I had a 'down ticks' day... I guess it was last August or so, when I lost £5k the day before I went on holiday as my adsl went down and I was halfway into legging getting flat so I could pack my suitcase. Not sure if I've had any since then... Of course, I'd be lying if I said I haven't had a down money day since then - we can't all be right 100% of the time!

Pobster

 

[fastnet]

Hi Pobtastic- I might be making false assumptions but that volume of trades leads me to think that you're trading in a different style entirely to that discussed on this thread so far.

Again, I might well be wrong, but it sounds like you're trading interest rate derivative spreads and taking tiny arb opps as and when they arise. This sounds like a very specialised set-up as it doesn't rely on technical analysis at all. Your trading style is probably similar to that of TWalker or any of the other professional traders on this board. Most of these guys are either ex LIFFE or were initially trained at one of the more reputable ''prop-shops''.

Most of the other contributors to this thread are talking EOD spreads in a range of commodity futures on an intra and inter market and calendar basis.

Having spent a lot of time explaining why I believe trading spreads as opposed to outright positions doesn't carry the advantages often claimed I would like to learn more about this style of trading. Further thought leads me to believe that simply the fact that relatively few traders look at charts of spreads is enough of an advantage to warrant a closer look.

Cheers, FN

 

[fastnet]

Fastnet,

I think that you have clearly identified the main benefits (aside from risk reduction) - the spreads tend to move with less volatility (particularly intramarket spreads) and tend to trend for longer (I believe). It is not the road to instant riches, but is a method for consistently taking an income from the market. It is a fairly relaxed (boring) way of trading.

Interestingly, JR's comment about spread trading being used by "insiders" is re-iterated by Dr Alexander Elder in his book "Come into my trading room" (p207-08).

Morning Bunyip -

Just looked up the Elder quote. He's an author I have long respected for his careful and intuitively sound approach to the markets. Strange that he should say this seeing as he is in the busines of running seminars on convntional, directional trading. . .

 

[fastnet]

Thanks everyone great help.

I have ordered the books by Courtney Smith & George Angell from the US.
I wondered how H20 found the Joe Ross books? Its a lot of money if it doesn't offer anymore than the other books.

Its nice to know it possible to trade from th UK.

Once again thanks for your help.
Any other suggestions always welcome.

Nick

Hi there Monarch -

Quick on eto ask what you thought of the books you ordered? Did you resist the JR tome on the subject? I'm looking to dip my toe so would prefer to buy one rather than three books.

BTW - I was wondering whether the recent (well 2 yrs ago maybe) introduction of stock futures would create new opportunities for trading stock future spreads. Of course it will but what I'm really asking is whether there will be predictable, repeated patterns formed in the spreads between different dated contracts or stocks in the same sector. I have absolutely no idea how you would go about finding out without charting tock future prices by hand and comparing the two? Any ideas? Again this could be an un-noticed and profitable niche outside the tide of the main market.

Sounds like the Douglas Ehrman book would be of more use here although from the title it could be focused on trading pairs of underlying stocks rather than their derivatives.