How do you approach trading spreads like this?

ok since you sound nice here are some tips. That chart is plotted wrong hence the spikes ie the prices at the extremes were not available ever. In the case of oil Brent & WTI only calendar exchange spreads trade on the exchange, higher order spreads like condors, flys, doubles etc are not supported. To plot a condor you plot calendar 1 + calendar 2 or to plot a fly you plot calendar 1 - calendar 2. In your example you should plot calender HJ + calendar KM for the condor. You will see the resulting chart is cleaned up without the spikes. Even then you likely cannot get the prices on in the spread at the chart extremes.

If you use software with an autospread TT/CQG/CTS you can create the synthetic spread with a synthetic book. If you place a limit order in an autospread you have to set parameters as to what you want it to do if you get legged (which will happen quite a lot), for example when and how much do you pay up in the completing leg. Condors and flys at the front of the curve hardly move at all. You will be paying 4 round trip costs to get in and out of a condor or fly. Retail round trips are around $3.50 in oil, $1.20 in prop but sub $1 for the big players. Ask yourself if you really want to be trading a spread that moves 2 ticks a day when it costs you $14 per round trip and its $10 a tick. If you are paying retails round trip costs in spreads you have to pick your battles. Either choose spreads where you are shooting for 20 ticks a spread that is more volatile AND/OR lengthen your timescale and swing trade as bone suggests.

I grew to hate autospreaders for 2 reasons. Paying £1000 per month for software on a £100k account isn't that smart. You are down 12% for the year right off the bat. Yeah I know new traders want to scalp and day trade, they will convince themselves 12% is nothing when they are going to 'kill it' and quadruple their account in 6 months. Facts are the more successful and durable people I have met in this business work longer time frames, yes there are a few exceptions like anything. A lot of the guys who were strictly flat at the end of the day now hold for 1 to 10 days, sometimes they are are in and out in a day, more typically 2 to 3 days. Second reason is in my experience using an autospreader means you have to be at the screens for long periods. Reason being if you have orders in an autospreader you always run the risk of being legged. For example I could have an order in a fly to buy a level, leave my screens to get lunch, come back and find I have been legged. Depending on the settings I put into the spreader will determine if I paid up or I am left hanging. It's just not a very relaxing way of doing business but if you are young you might think that staring at a screen 7am till 7pm is appealing, if you stay in the game as you get older and your commitments grow you will start to realise that staring at ladders 60-100 hours a week is sub optimal lol

Finally you sound like you have been reading around on spreads via forums/papers/books. Trust me on this the information you will find in these resources will only scratch the surface of the practical knowledge you will gain if you worked at a firm that specialised in energy including spreads. I would really urge anyone who is young and serious to join a specialist firm in any capacity and swing trade their own private account. You will learn more in 1 week on a trading floor than years reading books.

Have you tried swing trading outright directionally on longer time frames. daily bars and above. If a trader cannot make money doing this my gut says they will not make money trading spreads either. Spreads are not a magic bullet and its a huge can of worms.

GL

 

Ok, that's a lot to think about. Thank you for your comprehensive and frank reply which I really do appreciate.

I'm definitely staying away from the energy markets and auto spreaders for as long as I can, and only looking at the slower exchange traded spreads on longer time frames. I really do want to keep costs down, and I'm not that young anymore which limits my work options. Bone talked me into getting CTS Core, and from what you're saying I'll be able to see what's really happening, as modelling spreads on barchart .com may be sending me down the garden path.

 

1. Ditch Barchart. Utterly useless for proper spreads modeling.

2. You don't need "depth of market" to swing trade spreads. Ditch CTS for your purposes - you're not going to day trade spreads.

3. I have my clients use a proper FCM with a legit commercial 24 hour execution desk. Paying $1 / RT for execution is cost efficient for my low cap clients.

 

CTS trade sniper can.

 

here is a teaser for you and showing how reading books and papers can get you only so far. people with specialist knowledge in this field are trading things like the below chart. This is a double butterfly spread away from the front of the CL curve. It shows the market profile of last 8 days. It's 8 round turns to get this spread on so retail will pay around $32 to get a 1 lot on at $10 a tick it will cost them 3.2 ticks to get in and out so it prohibitive for them. The lowest volume tier clearing through a prop firm will get you around $2.20 a round turn so $17.60 to get a 1 lot on. The largest spread traders will be getting it done for as low as $10 but you would have to be doing huge volume to get that.

It doesn't take a rocket scientist to work out a money making strategy, the daily range is around 10-15 ticks. The best keep their leverage low. On a 20 lot a trader with a $100k account can comfortably manage their risk. If they bank a 7 tick winning trade $1400-$352 = $1048. If well capitalised and using low leverage scaling in is often used, positions are usually only cut if weekly /monthly ranges are violated. Hold periods a few hours to a few days. You need to make sure you have liquidity in the back leg.

When I talk about opening a can of worms this is what I am referring to.

enjoy

 

Typically, the more legs you have in an intramarket spread the narrower the trading range will be and the mean reversion characteristics will be more pronounced. As was so well illustrated in the previous post more complex Spread combinations are expensive to execute and slippage concerns are elevated to the point that the worthiness of the trade becomes an open question. From my own experience, the trouble with modern mean reversion outside the realm of pure arbitrage is the common angst of a substantial and sustained trading range move away from your modeled first order sigma Level wiping out your accumulated profits in that trade.

Speaking for many of my clients, they will be paying retail rates, so I concentrate on Spread selection and construction with a maximum of four legs that targets a sustained trend move that can be taken advantage of with modest capitalization in a retail setting.

We trade a lot of Butterflies and Condors. In all sorts of futures products - primarily those with serial expiries. A good working average for holding timeframes is about 45 days. (Longer end of the spectrum are STIRS). I typically see avg winners with one lot combos around $500 and avg losers around $250. Max drawdowns on multiple simultaneously held positions <5% (usually half that). Very good returns net expenses. It can and is being be done.

 

Thanks guys! Ok I'm trialing CTS Core and I should have done it earlier. There's so many exchange traded products available to explore on CTS, and then research on the CME website. I think I've found an interest rate exchange traded product I can get started with that has enough range and liquidity, and offers about 4 multi-day trades a month.

That's brilliant ... moving the double butterfly further out to increases the range from a couple of ticks to a more realistic 10-15 ticks. I've read a bit about this so it's good to see it in action. I guess you're "roughly" trading the value area of the range with your market profile, from one side of the range to the other. As you say, it may be a can of worms with your entire process discussed here, but your description includes various techniques and ideas I can immediately apply, and others I can aim for later down the track if my rates and fees ever improve. Regardless there's a lot you've discussed here that I guess applies to most areas of trading.

This really does sound like something to aim for. There's such a long way to go...

 

From knowing nothing about spreads to becoming quite competent and eager to trade live - takes my clients about 12-15 months.

 

Some of these exchange traded spreads are very thinly traded outside of the New York session, but the bids and offers are still very active (I'm looking at the London session and the New York open since I'm in Sydney). I'm on sim for the next few months and currently entering with limit orders placed out in the market, which seems to be working ok (yes it's only sim so everything works). Interest rate spreads are very very slow...

I'm wondering what type of orders I should use for Entry (limit?), Stop loss (market?), and Target (limit?) ? I'll be entering ahead of time as a bracket order (not worried about a tick or two slippage). I've only got stock and fx experience so this is new.

 

I know you are looking at rates but just fyi in energy the vast majority of volume including spread volume is completed between 12 Midday & 7.30pm settlement time (london times).

GL