That’s what took out Bright Trading in Las Vegas. Trading stock pairs for mean reversion. Those guys would model to fade a one sigma move, add on a two sigma move, etc. then . They’d hit four or five trades and then give it all back and a whole lot more on the sixth trade. I took a few of them on as clients after Bright folded and they were difficult clients. First of all they were traumatized - having on a position meant pain for them. They were used to standing in front of a downhill freight train. I mean, at Bright these guys wouldn’t wait for a turn or a hint of reversal - they just kept adding units. The other challenge was a completely different mindset and technique when it comes to modeling spreads.
that was how they traded it and it is also how many still trade it and i always tell people it reminds me so much of selling naked options. you crush it for months just to give it all back and then some and possibly more than your account in a few days or weeks. when the math and your brain keeps saying this is not possible this is not possible and you keep buying and all you need is a just a fraction of reversion and another player hears about it he is licking his chops saying. ha these guys are screwed i am going to help screw them and they will mess with the outrights manipulte them and force the hand to exit and just then those same outfits that forced the hand will buy the spread and help ride it back to reversion town!! lol it is so true but i like pairs and spreads at certain times just like outrights but yeah you are spot on about getting in front of a freight train. freight trains are only for guy moving enormous amounts of money and ti si the only way they can get an average price that makes sense based on what they are doing. the best study i think is amaranth/centarus and i worked with a girl who sat next to Arnold at Enron and remained friends with him to this day. that is a trip of a story and dont think oh whats his name t boone pickens didnt help make that spread blow out to help out his buddy and make billions in the process. to control the spread you gotta maintain the hedge but if just trading outright you can F up the spread by just moving one side and that makes the spread virtually an outright and that is why spread trading intaday is very dangerous and expensive. you end up trading an outright position when it is going against you and massive loss and usually when going for you it is hedged and making less. I still like them medium to long term but there is risk ineverything and I am by far from an expert eventhough i act like on on elite trader!
1 a is the spread chart of the gold silver ratio 2a is just december gold (this one looks like mean reversion to me) and it is an outright
Yeah, I’d say for 99% of the spreads we trade we don’t leg them, we use the exchange supported futures spreads. We are trading legit convergence and divergence, we are not scalping one leg against the other leg. Big difference in mindset and purpose.
13136 is dec godl outright and this one looks as if it is reverting to the mean over and over and (this is th e chart on the left the first chart) i see reversion here but not on the chart on the right the non reverting spread chart is the gold silver ratio spread chart. hope you learned something
implieds are amazing im very glad they offer them and i wish they offered more because they are good for the market before the hft you would get way more depth on the book i believe becuase you had way more at home spreaders throwing out big orders betting on the reversion and it was working lot sof times and hft said well f that. lets make it so fast that only the few can play the game and lets do it over and over again in micro time frames where anyone who is not DMA and hft cannot even see the reversion and we will actually make the bid ask spread the spread and thats what they do all day everyday. it would be difficult for anyone to argue that the bid ask spread is not constantly reverting to the mean!
I have a few clients that print money with metals spreads but they are in the LME and they are NOT in Gold vs Silver. I haven’t seen any of my clients trade GC/Si in years. I know it’s been several years for me.