Heres an example of how the multiplier works. If you are spreading 1 ho vs 1 cl the spread as you type it in the chart should be: 42*ho-1*CL. If you are spreading 2 ho contracts vs 3 cl contracts it will be: 84*ho-3*cl. This will ensure what you are seeing on the chart actually reflects how the two products are trading against each other. If you type 1*ho-1*cl you will see that the chart looks ridiculous and trending in one direction and is not representative of how the two products trade against each other. Btw that ho vs cl spreads sucks ass imo. Multipliers are actually confusing and was when i first started but really important to understand when spreading. If you ever change the ratio you.must change the multiplier to reflect the new ratio. Theoreticaly you can have a 2 different.multipliers for the same 1 vs 1 ratio and the charts will look the same. The only thing that changes is the pricing on the right hand side. There is little info online on this i would agree.
Depending upon your chart vendor you may have you may have to make " multiplier" adjustments to your scaling - this is true only for intermarket spreads ( different products same expiry typically). In fact, for intermarket spreads for some charting vendors the "multiplier" is different than the trading hedge ratio ( ex. - CBOT 2's vs 10's ). For example, if you want to chart the spread differential in US Dollars, you can include the tic values in your charted spread expression. For intramarket spreads ( ex. - CL Z4 CL H5 CL M5 Butterfly ) this is never an issue because the tic values are identical between components.
In Sierra Chart I can easily set the multiplier for either side of the spread in an intermarket spread. It is the ratio that I am still a little confused about. In the example, I see that the ratio does not actually translate into the literal ratio of contracts traded but rather into the point value in some way. If tick value had to remain constant for the two contracts (HO vs CL) then you would have to about 2.38 HO contracts to every CL contract to keep single tick moves the same value. I guess my question should be what is the multiplier actually doing for the charting of the spread? I know it shouldn't be this confusing, and I apologize in advance, but I am sure your average day trader (average typically aren't profitable anyway right does not venture this deep into learning the ins and outs of everything. Thanks
How will you calculate probabilities of success of particual futures spread using TOS? Doing it manualy somehow? And how we should select such spreads using TOS? It is not feasible option. TOS: 1. No seasonality charts (with different lookback periods) in TOS as far as I know. 2. No brute force filtering based on: historical wins%; actual position of price in usual historical channel; volume; no scanning for intra-commodity spreads and all possible combinations; I am not sure if it is possible to enter 3,4,5 leg futures spread combos using TOS (haven't tried); ... So TOS may be OK for trading simple double leg combos, but not for searching of opportunities and analyzing them.
tom_czr: How much does seasonality come into play for short term swing trades that only last 1-3 days? Can the spreads be traded like an outright using technical analysis? i.e. trendlines, support/resistance, moving averages, etc.
I don't use supports/resistance, trendlines, MAs anywhere in spread trading. But if it makes sense for you, why not For intraday trading "seasonality" is usefull for sure. If you have some skills, you can also calculate seasonality charts on intraday data... (most of services/softwares provide seasonality charts only on daily data).
Just to be clear - any very good price-based spread trading model will pick up on fundamental influences in the market such as " seasonality" or weather changes or economic data releases or relative changes in cost-to-carry or basis between product expiries. In the mid-1990's I was a Senior Commercial Trader in both real-time and forward electricity and fuels and transmission rights for the largest utility in the US. Big commercials like Cargill and ADM and Koch and Valero are always the first to re-evaluate market pricing whenever a production or consumption dynamic changes. Point being, things like commodities are worth what that last price print says. That last price print represents the distillation of all that is known by all active market participants. And big Commercials and Institutions do not allow markets to be mispriced under any circumstance.
Is there any advantage to trading spreads over outrights (aside from the ability to hold overnight for cheap) if I just wanted to trade based on chart patterns and technical analysis? Thanks
to Fedmayne: Maybe you should start trading both outrights and spreads and you will see. And maybe you should shift your focus to trading stocks, there are much more opportunities from what I see. I feel it similar as bone has written: "And big Commercials and Institutions do not allow markets to be mispriced under any circumstance."