Trading Spreads - is anyone actually doing it?

[-oo0(GoldTrader)]

Reminiscences

what are the practicalities on trading from the UK.

If it becomes necessary you can easily trade using email or international toll free phones.

Most sites, info etc is relative to the US markets, does anyone trade using spreads in the US and if so how do you get prices, orders filled etc.

You do your research, place your orders, access your accounts on the internet. Brokers can wire you your profits. They have toll free numbers and email access.

Do you have brokers that understand you are spreading and therefore set lower margins?

Is it practical?

It does not matter what the broker understands if you do not depend on the broker to do anything except what you tell them to do. Most brokers use exchange minimum margins. The margin department’s computers recognize spread margins automatically.

Has anyone got a recommended route to get going or book as a guide.

The problem with that is that most spread traders already have experience trading naked. People are all starting from a different place. Where are you going to start someone if they are not even familiar with “Reminiscences of a stock operator?” A lot of books have a chapter or two specific to spreads. I used to go to libraries, pile the books on a table, and go through the indexes looking for something new.

Trading spreads can be like trading anything else. After you have identified what you want to trade, you have found a trend and want to get on. Then you look to see if a spread will offer a better trade than an outright. In the end you are trading some trend. Whether you use spreads or not.

 

[-oo0(GoldTrader)]

Books

Good books (IMO)
- Trading Spreads and Seasonals (Joe Ross)

- Technical and elemental, teaches the very necessary how to read close only charts to trade spreads.

Spread Trading the complete guide (Courtney Smith)

Fundamental mainly, does not show how to trade.

 

[-oo0(GoldTrader)]

Niederhoffer

Another interesting book (IMO) is Spread Trading by Howard Abell.

More fun than Courtney

"There's no victory as satisfying as coming back from the grave..."
Victor Niederhoffer

What was it Niederhoffer said about slippage?

 

[-oo0(GoldTrader)]

email 24x7

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).

You can place orders 24/7 by email, so there should be no trouble when you are traveling.

 

[-oo0(GoldTrader)]

educational costs

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.

Excellent outlook..

 

[-oo0(GoldTrader)]

JR tome

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.

If the cost of your education is a problem, there is tons of stuff on the web. Reports, reviews, charts etc. Just use your creativity in Google. Copy reports, books etc on your machine and get to it later.

whether there will be predictable, repeated patterns

How do you plan to find patterns with only two years of history. It does not make any sense.

go about finding out without charting stock future prices by hand and comparing the two?

You can use a computer but you do not have a large enough statistical base to bet on.

 

[-oo0(GoldTrader)]

reviews

I will look at this book as well. I buy most of my books from Amazon (US) or Traders Press.

How about some reviews?

 

[-oo0(GoldTrader)]

get another broker

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.

Any regular broker can place orders MOC. Some brokers do not allow there clients full assess to the markets. The limitation is with some brokers not the game itself. Anyone that will take the outrights will take the spreads. If you want to trade grains and your broker does not trade grains how can you say the broker is limited about spreads. You have to get a broker that trades what your research tells you to trade.

As long as your clearinghouse uses exchange minimums the computer will give you the spread margin. If your broker does not cover what you want to trade or wants to add on additional margin, get another broker.

 

[-oo0(GoldTrader)]

from the other side

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.

We can all work together see Spread Trading

 

[-oo0(GoldTrader)]

All the big boys spread

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.

If for some reason you want to be exposed to the same risk, then of course you will need more of the lower risk alternative. Won’t it be more prudent to accept reduced risk instead?

If you are in China, or out in the boonies somewhere, and all that you have access to is a pencil, try this. Use any Moore spread with at least thirty trading days. You can get free closing prices and contract data at “Symbols & codes.” We can isolate your obsession with equal risk by using $1,000 of exchange margin risk as a constant.

1. Chart the daily equity of $1000 worth of the long side.
2. Chart the daily equity of $1000 worth of the short side on the same chart.
3. Chart the daily equity of $1000 worth of the spread on the same chart.

Examination of this chart should feed the right side of your brain with knowledge as to how spreads dampen drawdown. You should be able to see drawdowns for each security clearly. You can compare the volatility of being long, against short as well as to the spread. All we are really talking about anyway is the volatility of our own equity (just like the exchange). I am sure if I left anything out someone will catch it and advise us properly, but you can start with an idea like this.

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.

Seems to me an afternoon on SuperCharts would prove it to you anyway you wanted to look at it.

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.

What part of prices are lowest at harvest do you not understand?

Part of our return is receiving insurance premiums for providing additional liquidity to the commercials, spreads or not. The social utility of futures markets is considered to be mainly in the transfer of risk, and increase liquidity between traders with different risk and time preferences. It does not matter if the futures contracts are held naked or spread. If they are hedged its less risk to the owner. The market is always hedged.

I don’t get it. All the big boys spread. The only traders who do not are first time traders the majority of whom wash out in a short time.

 

[-oo0(GoldTrader)]

(boring) way of trading

is a method for consistently taking an income from the market. It is a fairly relaxed (boring) way of trading.

Nice!

 

[-oo0(GoldTrader)]

margin calculations

do spreads REALLY trend more than the outright contract?

Let me ask you this. What do you think trends better when the market makes a limit move?

I don't understand why the margin ratio is so much better or the risk any less than a conventional directional trade.

If you were naked last year when hogs went limit for three days on the naked and the spreads could not move, you might have a different view on that.

Of course you understand how margin is calculated on naked contracts, so you must be asking how it is different on spreads. The margin is calculated the same. If you do your own margin calculations you will see that the volatility you will be figuring for spreads is less. This one factor alone will reduce the margin requirement for recognized spreads.

 

[-oo0(GoldTrader)]

insiders

spread-trading is just a sales tactic

If it was, then how come the people who stand to gain from it the most, (brokers), do not know anything about it?

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.

Insiders do use spreads, but most spread traders are no-where near the floor of the exchange. Its not that spreads put you ahead. It’s that spread traders will be around when the naked traders are gone.

 

[-oo0(GoldTrader)]

Rom

But only with reduced exposure to potential reward.

What reduced reward?

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

Margin proves the lower risk. Do the math. Return on margin is much greater than trading naked futures.

 

[-oo0(GoldTrader)]

Sleep

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!

If it is safer overnight think how it will help when you are waiting for long term seasonal trends to develop.

 

[-oo0(GoldTrader)]

Risk

I don't see that your risk is reduced.

O.K. why is the margin less?

The spreads might well trend more readily and for longer - I wouldn't know how to set about proving or dis-proving this point.

If you can imagine a chart, make one up and see for yourself. We all did our own homework. There are no cliff notes on your thoughts.

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.

Why do you want the same risk. Lets take the example of forces that will move a nearby contract. If the far way futures are not effected. You could trade the near just like a skin trader. If you offset that with a far. Your risk will be less. If the far ends where it started the profit will be the same. The return on margin will be hundreds of percents times greater.

This time of year there is a meal spread that often ends up with gains on both sides. How do you figure that?

It’s like having two naked futures contracts with about a tenth of the margin on each.

 

[-oo0(GoldTrader)]

few traders look at spread charts

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.

Any time we spent on this is worth it if it gets you to experiment with spreads yourself. I think all along you knew more than what you have been saying.

 

[-oo0(GoldTrader)]

Seasonal

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.

Don’t forget seasonal!

 

[-oo0(GoldTrader)]

Reduced risk

if you want the same exposure to risk

Spread Traders do NOT want the same exposure to risk. Do you understand that. We do not want risk.

 

[fastnet]

Hi GT - wow, what can I say? I feel slightly embarrassed by some of my comments - especially those from a few weeks ago. I should point out that I have learnt the little I know about spread trading during the past month. I had very little to no knowledge of this style of trading before this time, This is reflected in early posts.

I am on holiday to Oz for a couple of weeks from tomorrow. I have printed out loads of free material (as advised) inc some of these threads and past charts.

I am convinced spread trading does offer advantages over outright positions especially for folk like me who enjoy trading but don't necessarily want to give up unrelated careers to trade full time. (even if it were an option in terms of proficiency!).

Thanks again for the time you have taken to comment on these past, and almost forgotten threads - your contributions are much appreciated.

Best regards, FN