Have System for SPX and NDX... what do i trade?

Discussion in 'Strategy Building' started by thereuare, Feb 6, 2004.

  1. I have a short term trading system that i am researching which produces signals that have a high probability of success on predicting the next 2 point move in the index.

    However, when i looked to actually trade this, i'm finding that there is no way to trade the indexes for just a point or two.

    E-mimi futures (ES and NQ) and the ETFs (SPY and QQQ) don't correlate closely enough to the indexes themselves. All of these tradable securities seem to have a premium/discount that varies greatly throughout the day. I also looked into index options but the bid/ask spreads were just too wide to trade for just a point or two.

    Is there something that i'm missing? Is there a way to actually buy the index itself... so that an X% move in the index equals the same percentage move in the tradable security?

  2. Pabst


    The variations in the basis are becoming miniscule. These index contracts are being arbed to death. Why not just apply your work to the futures instead of cash?
  3. I've looked at applying the system directly to the futures markets and it doesn't hold up (with the preliminary research i've done so far).

    The differences are not miniscule. On a market upmove the futures markets exagerate this move and will have a bigger premium over the inexes than just a few minutes early. A short while later if the market stabilizes the premium may have all but disappeared. If the market then starts to head down, that premium can quickly turn to a discount!

    Has anybody else noticed this or am i wrong in this observation.
  4. pspr


    That's the way they work. If you are playing for an ES point or two you pretty much need to be one of the first ones through the door and then be standing right at the exit.

  5. mind


    one explanation could be that what seems tradeable on the non tradeable instrument is already imbedded in the trading that takes place in the tradeable instrument.
    useless to research non tradeable time series for exactly that reason. IMHO that means: back to start.
  6. Hi thereuare,

    I am not sure if I understand you correctly. It seems to me though that you are inconsistent. How can you claim to have a system if it doesn't stand up in the market?

    Simply refuse to consider something as a "system" if it doesn't make enough money for you. I believe that I make a valid point here. For years, I struggled with your kind of problems till I learned to be without pity in my judgements about 'my' systems.

    Be good,

  7. Who trades cash anyways...

    Make systems for the market you trade.
  8. "Systems" that "trade" solely the cash indices on short timeframes are usually just useless and illusionary. There have been a ton of useless systems based on the cash indices developed over the years. They have the illusion of "should" working based on backtesting, but can't be used to actually trade anything reliably.

    Systems for trading a non-tradable entity are axiomatically of no value and since you say it doesn't translate to the related futures or ETFs, that should be a red flag for you that you may have simply stumpled on one of the many previously devised useless cash index systems.

    Also, the indices aren't really realtime - they usually only update every 5-15 seconds and don't reflect the actual instantaneous market price dynamics. Also note that the index value reflects the LAST price of each component stock (but due to timing, not necessarily the very last price) recorded at the time the cash index is updated - it does NOT necessarily (and quite probably does not) reflect the price at which you yourself could execute a buy/sell of a comparable basket of the component stocks.

    While it sounds harsh, from a pragmatic standpoint, unless your system works on actually traded instruments, it's just computerized mental masturbation.

    But if you want to test what might be about the only way your cash index trading system MIGHT be usable (since you say it breaks down and fails on ETFs and index futures) - you'd have to test it by factoring in the actual buying/selling of a basket of the underlying index component stocks in the appropriate ratios assuming the basket would be executed at the respective bids for a sale and asks for buys to insure timely execution (not the "last" prices).

    Even if you found that actually produced the results you expected from just looking at the cash index (which is by no means a foregone conclusion), the capital needed to trade the baskets could prove too extreme for you.

    Good luck.