What a complete and utter pillock

[c6ackp]

The guy on the coverage desk where I work calls this "index arbitrage" - I wouldn't get too carried away with this idea Jon. I was doing exactly the same in 2003 with around £50pp on the dow and £100pp on the ftse. The performance was amazing AND (nominally) hedged. This was until Saddam Hussien was found in a hole in the ground in Dec 03 and the relationship blew out and kept going and going and going (away from the "expected" historical relationship)...

All these types of strategies work great until they don't

 

[Shakone]

Seems to be an assumption that you think you don't have to be right on direction for this FTSE-Dow trade. But you don't have a directionless trade, you have two directional trades. And as such, you still need a stop on each trade. The fact that 20% could be lost on the trade implies that you're not using a stop, or risking far too much.

 

[barjon]

Seems to be an assumption that you think you don't have to be right on direction for this FTSE-Dow trade. But you don't have a directionless trade, you have two directional trades. And as such, you still need a stop on each trade. The fact that 20% could be lost on the trade implies that you're not using a stop, or risking far too much.

shaky

With long on one and short on the other direction doesn't matter. All you are worried about is the relative performance on the basis that one will outpace the other for a time then follow that by lagging behind.

With such trades you can't use stops - you just have to be guided by the net position overall.

jon

 

[barjon]

The guy on the coverage desk where I work calls this "index arbitrage" - I wouldn't get too carried away with this idea Jon. I was doing exactly the same in 2003 with around £50pp on the dow and £100pp on the ftse. The performance was amazing AND (nominally) hedged. This was until Saddam Hussien was found in a hole in the ground in Dec 03 and the relationship blew out and kept going and going and going (away from the "expected" historical relationship)...

All these types of strategies work great until they don't

No I'm not carried away with it, c6 - it's only a little play account, after all. Just explaining what I was up to and how I came to be such a pillock.

jon

 

[barjon]

Well, I'm sure that you'll all be delighted to learn that a bit of masterful spanish trading on my part - ie: do nothing (well I did set stops :innocent - combined with the volatile vagaries of the market to let me close this evening with a small profit overall. A nice R:R of 14:1 if you don't look too closely at which R is what

Now then, where's that which is more important: luck or wisdom thread...............Or, as CV said "Aren't you clever, you've just increased your account by over 20% in four days "

Back to the calmer waters of my equities, I think.

jon

 

[counter_violent]

Well, I'm sure that you'll all be delighted to learn that a bit of masterful spanish trading on my part - ie: do nothing (well I did set stops :innocent - combined with the volatile vagaries of the market to let me close this evening with a small profit overall. A nice R:R of 14:1 if you don't look too closely at which R is what

Now then, where's that which is more important: luck or wisdom thread...............Or, as CV said "Aren't you clever, you've just increased your account by over 20% in four days "

Back to the calmer waters of my equities, I think.

jon

Or, as CV said "Aren't you clever, you've just increased your account by over 20% in four days

Well that's not quite what I said......but we'el leave your version up. hahahahaha

 

[Pi3141]

Newb here.

Can I just ask, is this *loosely* what spread trading is all about? i.e. the idea that it's not the market direction you are trying to exploit, but rather, the slight differences in the relationship between two correlated markets?

Also, how did you workout that you needed to stake £2 for the FTSE? Was it simply a case of dividing the Dow close by the FTSE close?

Thanks in advance

 

[barjon]

When the correlation between the two securities temporarily weakens, i.e. one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the underperforming one, betting that the "spread" between the two would eventually converge.[4] The divergence within a pair can be caused by temporary supply/demand changes, large buy/sell orders for one security, reaction for important news about one of the companies, and so on. - courtesy Wikipedia

That's it basically, as applied to FTSE and DOW which have an historically close correlation.

The 2 DOW points = 1 FTSE points (thus betting double on FTSE than DOW for equivalence - £2 FTSE, £1 DOW) is not exact. A more exact rolling average has varied between 1.97 and 2.15 this year, so 2 is near enough. As you say it just DOW divided by FTSE.

jon

 

[stephen2003]

they normally move in the same direction.

 

[barjon]

they normally move in the same direction.

yes, of course, but FTSE often rises more strongly than DOW, or falls less swiftly - in which case a long FTSE and short DOW is net profitable. And vice versa.

 

[SuddenDeath]

When the correlation between the two securities temporarily weakens, i.e. one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the underperforming one, betting that the "spread" between the two would eventually converge.[4] The divergence within a pair can be caused by temporary supply/demand changes, large buy/sell orders for one security, reaction for important news about one of the companies, and so on. - courtesy Wikipedia

That's it basically, as applied to FTSE and DOW which have an historically close correlation.

The 2 DOW points = 1 FTSE points (thus betting double on FTSE than DOW for equivalence - £2 FTSE, £1 DOW) is not exact. A more exact rolling average has varied between 1.97 and 2.15 this year, so 2 is near enough. As you say it just DOW divided by FTSE.

jon

is it not better to trade a spread between say nat gas/crude something that must always have some economic link.

Also IG index has a differential price, say for ftse/dow or dax/dow

 

[oiltanker]

eu is down 2 trillion

 

[Splitlink]

eu is down 2 trillion

more or less.

 

[Bint_Crusher]

I'd get banned. Just do it again and we can rejoice yer suicide.

 

[echizen]

The important thing is to learn from your mistake and not repeat it.

 

[NVP]

I'd get banned. Just do it again and we can rejoice yer suicide.

Seconded............some of us are just happy to still be here on the Forum

N