NQ/ES Pair Trading

Discussion in 'Index Futures' started by Sashe, Aug 20, 2003.

  1. Sashe


    Is anybody, besides me, pair trading NQ/ES?
    I used to trade highly correlated equity pairs based on the cyclical patterns of the spread (i.e AMAT/NVLS, LLTC/MXIM, DCX/GM and so on). Most of the time I used dollar neutral position sizing. It could be either 15 min or daily charts

    When started trading NQ/ES I 've also decided to go with the dollar neutral strategy thus trading 2 NQ against 1 ES.

    What I have found is that the NQ/ES spread chart is almost identical to the usual NQ or ES chart. In other words it follows market very close, if not tick by tick. The NQ/ES spread is up on market positive days and vice versa.
    This all makes this type trading worthless and direction biased.
    I am really puzzled over this phenomena, maybe it depends on higher volatility of NQ over ES? May be it depends on the spread ratio? Anybody with experience on the subject?


  2. H2O



    You're talking about INDEX futures here. Like the name tells you they follow the exchange tick by tick. However they are different indexes. (S&P 500 vs Nasdaq 100)

    How is the correlation ON DIFFERENT time frames (1 minute - 1 day etc)

    So basicly what you 're trading is (2 * S&P 500) - (1 * Nasdaq 100) or the other way around

    If you look at the point value you get $50,- for the ES and $20 for the NQ.Based pure on point value you should have 2.5 NQ vs 1 ES (to get the same USD amount if they both move 1 point) Not saying you should trade it like this !!!!!

    So you have to take into consideration : Correlation / Volatility/ timeframe and Pointvalue.

    Hope this helps
  3. Sashe


    that I trade this spread as 2NQ:1ES which justifies the dollar neutral strategy I was talking about in my first post.
    Regarding the "index" nature of the spread I still dont see why NQ is the leading one. It seems to me that the percentage change of NQ will always be bigger of ES, still trying to figure out why...volatility must be the answer.
    When I was trading pairs like KO/PEP or LLY/PFE their spreads didnt depend on the direction of the mkt at all. Anyway thx for the hints.

  4. H2O


    I don't say the NQ is the leading one.

    When you trade stock spreads you have no different point value (if XXX moves 1 ct it's the same as YYY moving 1 ct)
    In futures this is different : If ES moves 1 point the value of this move is $50 vs $20 for every point NQ moves

    So don't look at percentage changes but look at absolute dollar changes (point change * point value)
  5. Sashe


    in stock trading it always depends on the pair.
    for instance when you have a pair like AMAT/NVLS you need to trade it with 2AMAT:1NVLS ratio for it to be in "dollar" par.
    There's also the "share" neutral strategy when for example you long 1K NVLS and short 1K AMAT, but I dont see how it can be succesful unless the stock with bigger price and hence bigger volatility read (%cng) moves in your direction.
    That's why in stock trading its a good idea to even up the dollars involved in the trade, not the shares. But for some reason it doesnt work with NQ/ES

  6. TG


    I trade it 5NQ to 2 ES. Range of late 220 to 300.
  7. on the chart 10 es versus 8 nq looks good, but then in trading you need an adjusted ratio for the different point value.


    why would somebody wants to trade the stock indexes on pairs versus outright?
  8. Last time that I was in the ET chat room, I believe Nitro was experimenting with a pairs strategy with ES and NQ. I think he is on vacation right now, so you may want to send him a PM as this thread may get lost before he gets back and sees it.
  9. For one, no uptick rule. Thus easier to get into both legs of the trade at the same time.

    Edit: I assume you meant why trade the indices vs. the stocks themselves. If you meant why trade the indices as pairs instead of just trading the ES and/or the NQ with different strategies, then the pairs system has a built in hedging mechanism.
  10. This is a true observation.

    The answer why NQ is the leading one is because it's the speculative market. The spec market tends to lead the others.

    Basically, there's the speculative market (Naz), the primary market (Dow) and the S&P finds itself wedged right in between. They tend to effect each other in that order, that is NQ first, then ES, then YM. Exceptions reinforce the rule.

    One of the major reasons for that is that i.e. the Nasdaq is a fully automated quotron, while primary markets have a lot of slow-reacting specialists in the underlyings, such as NYSE. Logically, the kind of immediate volatility is not possible here.

    Generally, we can say the primary markets have more underlying power, but move slower, and the speculative markets have a lot more velocity, while their strength can falter if primaries go against them. Weigh them against each other at all times. If you understand all this, and monitor all 3 markets, you're halfway there.

    My favourite market to trade is the NQ, because of its larger %moves and generally less noise as well as many other reasons. However, the downside is that you don't have any leading indicator whatsoever, like the NQ when you're trading the ES. But more reliability, less noise & competition make up for it.

    Have Fun,
    ~Scientist :cool:
    #10     Aug 20, 2003