I have a strategy i'd like to implement that has been backtested using the SPX and NDX indexes. Is there a way to buy/sell the "cash" indexes? If not, how closely correlated are the futures and the indexes? I would expect the futures to have a premium/discount that varies throughout the day, which could potentially make the strategy not worthwhile. As I'm new to futures... what would be the best way to implement a strategy that works well based upon the cash index? Or am i better off trading the SPY and QQQ instead as they would more closely mimic the corresponding indexes? Thank you.
- you cannot trade cash indices - you may build option-based positions reflecting the cash (e.g. long call / short put SPX or NDX -- see cboe) - you can trade the futures, they move as the index does (they lead the cash most time) - this is not the first thread opened today in this style, i am a little bit shocked - do you guys really think you will survive... i give you 15%
realize you will not get the same performance when actually trading the security as you do when testing based on cash. for example, cash closes at 4pmEST, futures at 4:15EST, slippage, etc. I would test with the futures or SPY instead of cash. May not be as profitable as you thought????
A couple of points: 1) If QQQ and SPY did not precisely track the futures, arbitrageuers would immediately step in to profit and then make sure the two did move in virtual lockstep. 2) Please backtest your strategy on the futures themselves, not the indices (because the futures represent actual trades that were made to establish a value, as opposed to the indices which are not themselves directly determined by trading), and make due allowance for slippage and commissions. 3) To my mind the best metaphor for the futures vs. the underlying cash index is a dog on a leash. The dog (the futures) is always tethered to the leash and the human who's walking him (the index), but sometimes the leash is taut (dog gets far out front of the human----high premium) and sometimes the leash is slack (dog is close to or even behind the human----low or even negative premium). But at all times the dog and the human are connected and eventually futures will revert to the mean ---- achieving a semi-stable equilibrium that reflects the underlying value of the cash index.
You could set up a basket with Interactive Brokers (or probably others) and buy or sell all of the stocks within a given index. I think you may find that slippage will have a large impact on your system though - unless you are selling into strength and buying on weakness. The real world has a way of destroying back-tested systems at time. Good luck. Let us know if it works out. In my experience, QQQ is quite easy to get good executions on Island, and it moves with the index... if it doesn't, arb it!
How come you can be successful but newcomers can't? If one puts in the research and exhaustive testing, the edge should shift from the house shouldn't it? thereuare: I think if you are swing trading (multi-day timeframe) the index, then the futures will mimic the cash index close enough for your strategy. I have a strategy based on the DOW that I have started paper trading the dow e-mini with and initial results are encouraging, but more paper trading is needed. If you are daytrading the index, well slippage could definitely screw you up.
"Or am i better off trading the SPY and QQQ instead as they would more closely mimic the corresponding indexes?" I think your system would work fine on the SPY or QQQ. You do need to try some testing based upon realtime quotes however to determine slippage. Slippage due to the auction market bid/ask does make a big difference. Also I hope your backtesting has looked at back and forward data not included in your optimized data set. One possible way for you to test based upon realtime data is to use a simulator like, [ads] This way you can really determine if your system is working and not risk your capital. Good luck!
Basket trading allows you to trade the indexes cash value. It is very common these days. One thing I would warn you of is that a lot of basket traders place odd-lot orders (less than 100 shares) since they are trading some many stocks at once. Many ECNs and exchanges have poor odd lot handling. AMEX is case & point. They are the worst! ARCA sends them to an outside handler etc... Another problem is that people think they are going to get the price they saw the idex at divided by the divisor. But the literal execution value can differ. Hard for people to swallow this concept at first. Ciao...
basket trading will cost you much more in commissions than buying either a tracking stock or futures.