would like to do more analysis on pair trades in energy commodities. What are the biggest factors in analyzing a spread trade like this? Standard deviation and correlation are the two I would Think are most important, correct ? Thanks.
There are intra and inter commodities. What are u focused on? Are u looking to swing or short term trade? How much of fundamentals in the commodities that interest you do you have? Are u looking at it technically, seasonally Or statistically?
Why energy commodities? Why not index spread, or rates spread? Energy spreads are very serious. The comment above points out that there are many different kinds of spread trades going on in the energy complex. Each type of spread is unique and will require insight into the energy industry, historical tendency, and the ability to interpret current events. There are many different things you will have to know to trade these well. What is your level of experience?
There is no such thing as "standard deviation" in the marketplace. A fact very few realize. To have a standard deviation, you need to have a stable average. Averages are unstable in fat-tailed domains. It has infinite variance. Research further. I can point you down the path to gain further understanding.
A spread on ES is basically the interest rate right? Seasonality is most important unless you're talking intracommodity spreads. If your account isn't large however you'll be limited to exchange traded spreads, so seasonality is basically the only thing that matters (there are some exchange supported intras but they aren't as flexible as your post is implying you want). I'm still learning this myself - but this is what I gathered so far.
You are talking about a calendar spread. I am not. An index spread is the differential of indexes. An example is buying S&P 500 and selling Nikkei 225.
The OP want's to make money not theorize about the possibility of the world ending. "Research Nassim Taleb". OP, I am currently working on something similar. Check out the thread I posted "A simple approach to finding the hedge ratio". There is some good info there. I would also recommend heading over to stackexchange and reading stuff from @RichardHardy, he looks at OIL and NatGas once or twice. If you want to keep things very simple, you can use a rolling total least squares TLS regression model to find your hedge ratio. Do you program? I can send you some R code if you would like (@Kevin Schmit posted the TLS function in the thread I mentioned above). In regards to correlation, be careful! You might get a spurious relationship. Take for example the correlation between SHOP and KO. The pairs goes through periods of high correlation but that does not mean a real relationship exists. You will be better off looking for cointegrated pairs. Hope that gets you started.
Spreads- typically the last segment of the market that consistently losing traders learn about before they finally quit trading. Brokers n exchanged love spreads its double feed double slippage and double commission. yay!! when you discover spreads at first you are like omg. its the holy grail what took me so long to find out. then you look at charts and u are like omg. they chart so clean wow and the margin is low. omg everything on the surface looks great but whats really going on is you will be lulled into them and paying for expensive software and maybe even a mentor or coach or class for 1000s of dollars. the coach will say...this is how most pros trade..as if they know. you end up doing all the same bad habits that u did in outright trading but it gets worse! because margins low u can do a lot of spreads and then when it doesnt go your way ur loss will be huge because your mind says oh yeah spreads always come here and go there. its the same but now u have a whole new avenue to study etc. and then you have other risks legging risks exiting n entering. slippage is huge and lots of times the mkt just keep on acting not normal. google trader rambo. he lost millioms in a week on spreads. its just like an outright chart you must trade well. problem is mosrt dont. grain butterfly spreads bu t fees n commission eat up profits fast. imagine trying to buy 10 oil contracts n sell 10 in a fast mkt. u get 1 side filled now u are short or long a 10 lot unhedged. so this typically happens in fast mkt and it can literally crush your account. spread trading can be like selling options u do well then one day its gone. goodl stay away
How does a spread crush your account if you are sizing correctly? I made 40% on a put spread last week but if it had gone to 0 it would only have been 2% of my account.