Thank you guys for the responses to the thread, shout-outs to all of ye. I also thank you folks not in this thread but in PMs for the support. I have taken the input y'all have given me and am applying all those re-assessments and am still working on it. I appreciate your honesty, it is refreshing. I have known for some time that I simply do not like "daytrading" from intra-day chart patterns. While it has given me some success, more often than not my stops are too tight and I get whipsawed. Bone, as to your comment about being more fortunate than I may realize? I was very fortunate, as the only thing I lost was the Jan 2018 profits. So two months into 2018 I am back to where I was at end of 2017. In retrospect Jan was an insanely profitable month, and that is the one positive thought I can pull from the experience. But I cannot let it happen again. It seems we are in a new volatility cycle that I am not able to process. Again, thanks y'all for the feedback.
Hello Mav, You indicated that one size does not fit all with spreads - grains, energy, interest rates are all very different animals. Would you please elaborate on this a bit as it relates to incorporating non-price features / variables into your trading plan when trading spreads. Are there categories of spreads that you think could be effectively traded on price action alone? For example, stock indexes don't outwardly appear, at least to me, to have as obvious a driving factor as weather is to NG. Thanks
Spreads in indices are simply pseudo interest rate spreads if you are talking about the same product. For example, in ES, the spread between march and june is the cost of borrowing X at time t to time T. The dividend component we'll say is exogenous and fixed. So there is not much utility in buying March ES and selling June ES unless you are an arb player with near zero execution cost that is trying to capture a tick or two in edge. The real core spreads are in rates, grains and energy which are very fundamentally driven. I would not recommend using price action to trade those spreads. Get yourself a few good books and learn about the fundamentals of these spreads and start building some really simple models. You can use technicals to overlay the models but you need to have a big picture idea of what you are trying to do first.
Also, I feel like I'm stating the obvious here but I'll say it anyway. NEVER leg a spread. EVER. The "spread" is the trade, not the legs. If you are going to leg something then just trade the most liquid leg by itself directionally since that is actually what you are doing.
Just my own experience - fundamental movements are reflected in price action. You can indeed consistently trade intra market spreads (like a corn butterfly or a WTI Condor) using a price model. If you are OK with not buying an absolute bottom or selling an absolute top and you are NOT day trading then yeah you can trade spreads consistently with price action. And my big caveat is that these days I am a swing trader and not a pip trader. There was a period of time in the 90's and early 2000's where I would literally take a thousand lot (and more) spread just to take half a tic out of it - then go home. But those days are long gone I'm afraid. Markets are much too efficient and the bid/ask too fleeting a quarry for that nonsense unfortunately. Now, I can very much appreciate strong fundamental understanding - I used to trade commercial energy and the treasury basis. And I completely agree with Mav that having that level of fundamental knowledge is quite desirable. But speaking for myself and my client work, I think that it might be a stretch to expect let's say an ES scalper for example to acquire the requisite level of fundamental expertise to consistently anticipate the forward curve supply vs demand machinations in one particular instrument - much less the entire interest rate, grains, softs, and energy complex. I personally don't know of any singular person with that level of fundamental knowledge. These days - unless you're a commercial trader or a specialized trader on a HF desk, I'm not sure that an independent could make a living specializing in one particular spread unless his fundamental knowledge base and capitalization were considerable. I recall walking away from a really great proprietary trading gig in Glenview IL because I was confined by the firm to the Bund, Bobl, and Schatz. I felt like I was forcing trades. I wanted access to the entire sovereign interest rate complex; I wanted to be more selective and opportunistic. Of all things, ICE #11 Sugar has been one of my best trades the past five years. Intra market spreads - mostly Butterflies. And quite honestly I know dick about it fundamentally. But I can construct forward curve scenarios and model the price action with great resolution. But on the other hand Mav is certainly correct - if you know ICE ARA Gas/Oil like a MF'er then you would be great at spreading it no doubt. Again, just my 2 cents. Seems to work for quite a few clients, too.
Mav is entirely correct about intra market stock index spreads like ESH18 vs ESM18. But I've known and seen traders do well with volatility ratio'ed inter market index spreads like FTSE vs EuroStoxx; ES vs NQ; Dow vs Russell - stuff like that. In fact, I have a client who runs a small but sexy CTA and all he does are stock index futures inter market spreads. He tends to capture allocation rotations like going from big caps to small caps; techs into industrials; stuff like that. He spends an inordinate amount of effort into volatility adjustment. He gets paid for alpha generation so he's trying to engineer as much delta out of it as he can - which is like pushing an elephant uphill but he really tries anyway. When Mav says "to never leg a spread" - In my own mind I take that meaning as to use the exchange spreads. Which of course I agree with 110%. I would guesstimate that 95% of the trades my clients do are exchange spreads. IMO the exchange spread is the best thing the exchanges have come up with in the past two decades. If you are using the exchange spread, you are guaranteed of three things: 1. No legging risk; 2. Fully supported SPAN margin treatment if your FCM Risk Manager is worth a shit; and 3. That particular exchange supported spread will have very high levels of fundamental and statistical correlation.
I personally provide my clients with other proprietary info I've generated over the course of several years, but here is some public info. It is limited in nature and I question how much of it could be translated into actionable intelligence as it were. Not much "why" and quite a bit of "how". https://www.cmegroup.com/confluence/display/EPICSANDBOX/Futures+Spreads http://www.cmegroup.com/trading/interest-rates/intercommodity-spread.html https://www.cmegroup.com/confluence/display/EPICSANDBOX/Implied+Intercommodity+Ratio+Spreads https://www.cmegroup.com/confluence/display/EPICSANDBOX/Inter-Exchange+Spreads https://institute.cmegroup.com/whitepapers/stock-index-spread-opportunties https://www.tradingtechnologies.com/solutions/spread-trading/ https://www.tradingtechnologies.com...and-strategies/cme-globex-recognized-spreads/ https://www.theice.com/search?q=spreads&site=theICE|IntercontinentalExchange&client=ice_frontend_html&proxystylesheet=ice_frontend_html&output=xml_no_dtd&filter=0&getfields=*&num=10 Most traders are NOT aware of the fact that there are SPAN Margin credit agreements between exchanges. For example, there is an agreement between the CME and ICE for the mini-Dow vs the Russell. Just looking at the SPAN calcs you can likely gleen more info than you can from the above links. Here see pages 13 through 20:
Here are some exchange supported CME intra market spreads. (there are a few inter market spreads as well) This is just a fraction to the CME exchange spreads. ICE and Eurex will also have literally thousands of combinations. You can use a single price ladder to execute a slew of legs with the exchange spreads. In other words, you see a singular spread price with bids and offers on your screen, you get filled - and lo and behold in your fill window you see all the individual legs you just bought and sold in the blink of an eye. If you get good at this, and carry stuff, and suck up any sexy opportunity that floats by you - be prepared for a thirty page statement. Model away ! http://www.cmegroup.com/trading/ene...CL§or=CRUDE+OIL&exchange=NYM&pageNumber=1 http://www.cmegroup.com/trading/int...ctor=INTEREST+RATES&exchange=CME&pageNumber=1 http://www.cmegroup.com/trading/agr...§or=AGRICULTURE&exchange=CBT&pageNumber=1 http://www.cmegroup.com/trading/int...ctor=INTEREST+RATES&exchange=CBT&pageNumber=1 http://www.cmegroup.com/trading/ene...INED+PRODUCTS&clearingCode=NY-RB&pageNumber=1 http://www.cmegroup.com/trading/ene...§or=NATURAL+GAS&exchange=NYM&pageNumber=1 http://www.cmegroup.com/trading/met...ml?marginsTab=INTER#exchange=CMX&pageNumber=1 http://www.cmegroup.com/trading/agr...§or=AGRICULTURE&exchange=CBT&pageNumber=1 http://www.cmegroup.com/trading/int...ctor=INTEREST+RATES&exchange=CBT&pageNumber=1
So Bone, here is what I would say regarding one just trading technicals wrt to energy spreads. There is a very complicated seasonality structure and hence complicated volatility structure to most energy markets. One HAS to understand this to trade that space. For example summer gasoline blend vs winter. These markets are completely different. In fact summer gas has the synthetic rin prices embedded in the gasoline price. These rins trade like bitcoin. In fact worse in that they are arguably very manipulated. This means that gasoline spreads in Jan trade very different then July. One simply can't or shouldn't look at a chart and say the trend is up so I'll buy. You HAVE to understand that one cannot buy this spread technically. You could go out on the curve and say, hey I'm going to master the technicals of end of season summer gas by modeling the Aug/Sept gasoline spread and only trade that spread and month. Even then, one has to understand that the volatility of that spread is highly erratic and it will be very tame and slow moving during the winter but as you approach the roll, the volatility will explode. This affects things like position sizing, profit targets, stop levels, etc. Trust me, this is insanely complicated and I have put a lot of time into this. I would strongly caution anyone from entering these markets without the requisite knowledge of what they are doing. The same goes for heating oil spreads, WTI, Brent, Natural Gas or even Ethanol spreads. Every single one of these markets has very unique and individual characteristics to them. They all have quirks where if ignored will blow out your account two times over. It has taken me forever to find them all and I'm still discovering new ones every day. The good news is for the aspiring trader, there is some edge in these markets once you put in the work vs say ES where there is virtually ZERO edge. So I think the effort is worth it for sure. But I would be very careful about leading retail traders into this war zone if they are not properly armed with knowledge. A lot of these spreads look good on charts. Very smooth and stable then bamm, one day they blow out because of one of these so called quirks. I'm not saying one can't use technicals trading energy spreads Bone, but I think they do need to know what they are doing so at the very least, they can properly position size in these markets. Many of these spreads look like they are quiet and don't move. But that is a trap I can assure you. Their volatility is highly clustered and hidden. The most attractive trades have the most hidden volatility in them so they lure newbies into them thinking isn't this a cute smooth trend. I think I'll play that. LOL.
Mav, I hear what you’re saying about particular aspects of the energy space. I spend a lot of effort with clients talking about the volatility risks associated with refined distillates, precious metals, Cotton, and a few other examples. Also, IMO in terms of intra market spreads generally speaking there’s more volatility risk and delta directionality associated with a calendar pair versus a butterfly or condor. And in terms of risk - Generally speaking it goes without saying that trading those markets both of us mentioned outright flat price would carry more risk than other products. In terms of risk management using exchange spreads and a stop limit order with some reasonable slippage seems to work for a stop-loss. But no, I don’t think a newbie would last very long with a $10 K retail account trading outright RB Gasoline or the RB Crack Spread for that matter. Speaking for how I handle my own clients - I encourage a discussion with them before they start to trade live. And depending on their capitalization I will suggest product limitations and position sizing. Quite frankly for newbies I suggest they ignore about half the energy complex, precious metals, Cotton, and a few other products. It does me no good at all to see clients get blown out. I like to see clients start out strolling - not sprinting. I encourage clients to grind out income and build account equity. For the most part we’re trading boring markets. I know what volatility is - I’ve traded heat rates and real time power in July and August; winter and spring Nat Gas Swaps; FERC transmission. I’m a firm believer in grinding out income in boring markets that you can lever. And in everything there is calculated risk.