I distributed to clients a white paper I wrote with respect to what I consider to be a minimum acceptable amount of exchange data required in order to take an entry on a particular spread combination. The purpose of this guidance was to establish a minimal baseline of data points and a threshold historical timeline in order for the proprietary studies and our rules set to function with an optimal degree of confidence. This guidance affects a small population of less liquid intra market spreads, and this issue has been a rather rare phenomenon to date - it manifests itself largely with newer clients who are just getting started paper trading. My 3K minimum contract expiry OI rule, which has been in place for years, has been and continues to be a good rule.
Clients who are "greener" and have just started to paper trade typically err on the side of being too early with respect to trade entries. More experienced clients who have been paper trading for four to six months will show more patience and allow a trade set-up to more completely show itself in terms of the indicator package and our entry rules; therefore, the spread combinations ( especially intra market combinations further back in the curve ) they choose will almost certainly have adequate historical data.
Hi Bone, Thanks for the thorough reply. I have an unrelated follow up question. I've heard you and others talk about lead-lag relationships in spreads. Would you please explain what's meant by lead-lag in the context of spread trading. Please explain like I'm the proverbial five year old. Maybe with an example, how's its traded and why lead-lag is a good thing (assuming it is). Thanks
This is my personal opinion, and there are certainly other valid opinions about this out there. "Lead-lag" to me at least is defined as the use of automation or very good manual point-and-click skills to "pick off" one of the products in a highly correlated intra commodity or intra product spread pair ( or one leg vs several or many in a highly correlated basket ) for a quick tic or so. The strategies that I hear of working these days are automated. In fact, many years ago, there were times when I was manually legging a spread on a very short term time horizon where I just took a tic or two profit on that one leg without ever executing the other leg. It's happened in the pit and its' happened on the screen. I'll give you a couple of examples that were relevant a few years ago. There was a period of time where the Canadian Dollar and the Crude Oil Futures contracts moved virtually tic-for-tic. I had some clients who chose to scalp the "trailing" product against the first mover or "leader" for quick profits. Around the same time period, the same relationship existed with the Australian Dollar and the SFE T-Bills. You could never say which product would "lead", and the relationships as I recalled lasted for a few to several months before they fell apart. In terms of the two clients that I know did this for several months - while my understanding is that is was to various degrees profitable for them, they were so engaged and hyper focused on one or two spread relationships that they ultimately ignored literally thousands of other spread combinations in the marketplace. Furthermore, the cointegration lags and disparities between these products could be very hostile. Also, your statistical sampling and modeling is always a look backwards, and when these once highly correlated intra market pairs decoupled, you could suffer a very bad streak of losses before the sampling caught up or you'd bled enough. It would be, in my opinion, very difficult to do this with the obvious examples like SPY vs ES, or ZF vs ZN, or CL vs HO... When these relationships fall apart, it can be brutal. The Bund vs ZN and quite frequently Brent vs WTI come to mind. While I teach my clients to perform the statistical correlation analyses to ferret out unique intra market spread combinations, I do not show them how to scalp "lead-lag" relationships per se. For most clients, it would be a distraction from managing a portfolio of swing trades, and without a substantial investment for the ECN infrastructure and the requisite specialized programming required to properly automate such a strategy it is a "horse for another course" as it were. Ultimately, I have to teach material that gives the best chance of success to the largest cross-section of clients with varied trading backgrounds. Which is why we swing trade a portfolio of spread combinations which are diversified across all electronically available market sectors ( energy, interest rates, softs, grains, etc. etc. ).
we? ..... As in the all of us? You should re-phrase your post to something like: "thanks man, I learn so much when you speak to yourselves."
If people can't tell that he's using sockpuppet accounts, they deserve what they get. Bone/tonysoprano has his history plastered all over this site. Let the customers do their due diligence and make their bets...
Pure unadulterated horseshit. If Barron can find that I have ever posted under another account or pseudonym or IP address than "Bone" in the 13 years that I have been an ET member, then I would encourage Baron to say so publicly here on ET.
I find that it can even vary by session as well. I notice that in the Asian and European sessions, CL is more tightly correlated with DX and 6E than it is during the day session. This of course probably has to do with greater volume in FX futures during those times.
The longest-lasting intra market, "not terribly obvious" lead-lag positively correlated spread relationship that I can recall seeing was the Japanese Yen and the third contract month Eurodollar in the 1990's. Lasted for a few years.