Futures Trading

Discussion in 'Index Futures' started by amsterdam, Dec 23, 2011.

  1. To any futures trader out there willing to share their knowledge,

    Why is CL and ES positively correlated?

    From my understanding, wouldn't higher crude prices lead to higher costs for business's and less money in the pockets of individuals, so ES should be negatively correlated? Or is it that oil companies represent a significant weight in ES?

    Also, why does it seem that CL leads ES?

    I simply don't understand this. ES is a leader in itself, shouldn't other products strength/weakness be derived from ES performance and not vice versa.

    And to any futures trader out there, what is your product of choice to trade. Trading ES is very tough, it's a leader so harder to read and there is simply way too much noise in this product.
  2. onelots


    it's about risk. theses two products are considered risk products and are generally divergent from the dollar. however, es and cl also diverge from eachother once in a while. especially when oil gets two high and might be a further drag on the economy.
  3. 1) Fundamentals and "economic" considerations aside, ES and CL are each driven by "excessive speculation" and "liquidity". :cool:
    2) With ES, there may not be enough volatility for your trading system or psychological temperament to trade it well.
    If the VIX were to get higher, ES may become "easier" for you to trade. :)
    3) It can be easier to "push" CL around because there's much fewer contracts at each tick on the price ladder compared to ES. :eek:
  4. You bring up a VERY good point on how ES is easier to trade when the VIX is higher.

    So again, I have to ask, what products are futures traders trading under a high/low VIX?
  5. onelots


    in order of number of trades: es, euro stoxx, ten year notes. at all levels of volatility. stoxx and notes are for divergences. if you trade the right levels, es is a piece of cake and runs the show.
  6. BSAM


    YM...Just speaking for myself.
  7. Just go to any free delay charting site...pull up all the futures trade instruments and one by one analyze the price action with their chart next to a chart of the VIX via whatever time frame you prefer to trade.

    You can easily answer your own questions considering you're question really is a trade strategy specific question. My point, everybody is using a different trade strategy and their answer most likely will not be suitable for you and different from each other because you're using a different trade strategy.

    Therefore, after you have your charts up, you can then determine which trading instruments via your trade signals will perform good or bad when the VIX is high, low, trending or range bound. You're own answers will give you a boost in your trading results.

    My point, asking for what futures products are being traded by others when VIX is high/low is greatly missing the point by a mile if there's no discussion about what type of trade strategy the trader is using to exploit their trade instruments when the VIX is high/low. Simply, some strategies only perform well when there's high or increasing volatility and other strategies only perform well when there's low or decreasing volatility...same is true for other strategies when the VIX is trending (up or down) or range bound.

    Knowing when and when not to use your trade method is an edge. Think about it very carefully, every trader are suppose to have drawdowns or consistent losses of some kind or another in theory at some point. Therefore, imagine...for example...if you discover that your trade method doesn't perform good when the VIX is low or range bound. You could only trade when the VIX is trending or high and stay on the sidelines (no trades even if you have trade signals) when the VIX is low or range bound...essentially you'll be avoiding trading when you're most likely to experience a drawdown period or consistent losses.

    Taking it further...you can even determine when to switch (change) trading instruments based upon the performance of your trade method when the price action of the VIX changes.

    Yeah...that's a big WOW.

    This is very not true if you've implied that the S&P 500 Emini ES futures leads all the time or most of the time. Markets are too interconnected and too many global events/economies move the markets one direction or another direction. Simply, one hour Gold is pushing prices, another hour its Oil pushing prices, another hour its Euro-dollar pushing prices, another hour its the U.S dollar, another hour its something else...

    Yeah, the S&P 500 Emini ES futures can be a leader for awhile on any given trading day. Same is true for any other key trading instrument that's globally traded.

    Merry Xmas and a safe happy holidays
  8. They also might be positively correlated (CL and ES) because if the economy is about to pick up (optimism), more oil will be consumed together with the economic activity, so oil will be an increasingly scarce resource, thus increasing the price. It's all speculation in the end, but I see a lot of sense in them being positively correlated.
  9. Oh and hmm no, look at it this way. The ES is derived from the S&P500. The S&P 500 is a collection of a large number of companies. So the ES is the future of the derivative (derivative of a derivative) so it's not a leader. The basket of stocks that make up the S&P500 are the leaders collectively. ES just follows, especially with insanely tight arbitrage that exists in the markets.
  10. Gave this some thought awhile back after noticing how in-lockstep these prices can seem. Keep in mind that both CL and ES are influenced in realtime by currencies. I think those small related movements during the day are better explained that way than by micro-adjustments in economic sentiment.

    Somewhat simplified example, just comparing USD to Euro as a proxy for value:
    CL trades at 99.50 USD
    USD/EUR trades at .7658 (EUR/USD trades at 1.305824)
    USD/EUR falls to .7641 (EUR/USD rises to 1.308729)

    -> this is a 0.22% reduction in the value of a dollar
    -> this means you need .225% more dollars to buy your oil
    -> CL price fairly becomes $99.50 + .00225 * $99.50 = $99.72137

    "But aren't equities (ES) different than commodities?" you may ask? While the value of a business is considered the value of its discounted future cash flows, they adjust their prices accordingly - so the value of the equity interest in a business, everything else being equal, can follow the same story.
    #10     Dec 23, 2011