>> It's easy for me to have stories to tell from the trenches because I'm doing this every single day and its a 24/7 career. Also I have seen the numbers... I know the amount of people coming in, leaving... and I have a very reliable estimate as to how much 'risk' someone makes and how much they would take home per year. And trust me, the number is not pretty. It's actually pretty shocking. Put it this way, from all the traders I've heard about, and seen, and all the successful guys, and the ones I have sussed out info from... it seems like for us to make 250k/year on a 75% split, the average punter would need a max stop/risk threshold of ~20k daily. It gets tested over 6k about twice a month. Where it lands for the day is random. This isn't someone who is using the model of 'high activity trading' for rebates, though as their return would be much much less (due to their very short stop losses and high rate of churning). This already means a deposit in the account. This isn't counting a rogue 3-months where some huge announcements come, like out-of-nowhere ECB announcements etc. >> I wish there were big outrighters at my firm who were consistent and had great ideas enough to provide useful information for but unfortunately there aren't. When we had little 'class talks' with the biggest guys in the firms, all on separate occasions they mention the necessity for spreading as a solid and reliable edge over time. They said, even if you don't spread two legs, always watch for the relative value and if you're buying something then buy it because it's cheap relative to something else etc. We used to have a huge number of outrighters in the office. 90% of the office was outright only. But this was between 2007-2011. Most of them are all gone. They never adapted. They would see spreading as stupid and useless and never believed it. They never really tried to give it a go. Lots of them got wiped out The saturation of algorithms and bots have deteriorated price action. Your reason for entering/exiting became a little less clear now. There's no longer a certain number in the book you can front-run, and hitting out if it >> I will be perfectly honest with you as well, over the past month I have taught myself how to trade outrights because many of the spreads I am involved in are actually more risky leg-to-leg than the outrights. The spread volatility needs to double or triple for there to be less risk and for them to provide opportunity of trading multiple times a night without the use of legging extensively.
Let us see if you can walk the talk. If you have two instruments A and B with volA and VolB as volalilities. How do you design the spread? Write the major steps and the equations down, the tests you would do to decide on the spread, etc? You can add notation as you need.
>> Most of the spreads I trade are fully hedged and basis point for basis point. e.g. STIRS vs. Bonds, different bond duration, etc. You don't need to sit there and custom-make spreads. But there are a select few that we can do anyway. We are not quant-based but I did learn this. >> Anyway here's a basic guideline as to how I would create a spread from scratch for equities (assuming you believe they somewhat follow each other). It's not mathematical, but its based on observation and feel and watching it over time. [Step 1.] First you need two products you believe fundamentally should relate to each other. I watch the Australian spi vs. the S&P500. The correlation function (using CQG) varies on the time interval for 15-min to 60-min but it hovers between 0.4 up to 0.8. So they're positively correlated to each other. [Step 2.] Now we will calculate a "perfect theoretical spread" assuming both spreads moved in a perfect ratio. Spreads do not move perfectly in unison. This must be done so you know you're on the right track. S&P500 > S&P500 current price = 1808.25 > 1% move = ~18.0825 x 4 = ~72 ticks > This represents 72 x $12.50 U.S./tick divided by 0.90, AUD rate) = $1,000 So if you entered the spread, and you made 1% on the E-minis leg you would make $1,000 AUD SPI >Australian SPI Price = 5330 > 1% move = ~53 ticks = $25/tick x 53 = $1,325 AUD So if you entered the spread, and you lost 1% on the Spi leg you would lose $1,325 perfectly hedged Total net change: You made $1,000 on the E-minis. But you lost $1,325 on the Spi on the same 1% move if they moved in line. You need to be over-hedged in the E-minis to make up the Spi loss by approximately 30%. So if you buy 10 spi, you need to be short 13 eminis provided the exchange rate stays the same, assuming the spread moves perfectly in unison. [Step 3.] If only spreading was perfect. Unfortunately, it requires time and devotion. If you actually watch most inter-country spreads, you will see that two legs are guided by individual fundamental moves that don't impact the other leg. Now, we want to ignore what the 'perfect ratio' says, but instead find out exactly, based on charts/data, how much each leg has been moving during that specific time-period session. Also, in CQG you can apply a Correlation function to spi & emini and find out its always between 0.30 to 0.80 on a 15min to 60min candle during the designated zone of Europe to U.S.A. Most important part is here, I now applied a 6-hour ATR. My charting program doesn't allow me to collect specific amounts of data for certain times. But I used a 6-hour ATR because that seems to be the average trade time anyway. You can toggle around with it but most of your spreading execution will come based off experience. This is filtered out for the exact same time. Notice how the ATR of the Spi (left) and the Eminis (right) follow each other. That means as the minis moves more, the spi also moves more as the weeks go on, and vice versa. So we know they're moving relatively in line with each other based on the volatility of the minis. This is what I want to see. I want to see the E-mini volatility transcending over to the other leg. The above chart was used just to check the reliability of the spread. When the E-minis is dead (low volatility) will the spi probably be low as well? And what about the other way? The answer is yes. I used a value of 14 for the 6-hr ATR. When I applied a small 3-slot ATR to the 6-hr ATR the chart can give us more recent information: From the chart we can take the most recent (blue) data set. The spi moved 7-ticks x $25 = $175 , and the E-minis moved 3.35 x 4 ticks x $12.50 divided by 0.90 = $186 If you were to overlay both the data-sets you would find that the difference in ATR between the two legs varies by about ~30%. In fact, it ends up being totally random whether or not you knew to overhedge minis by 30%, keep it flat (0% extra), or under-hedge it by -30% against the other Leg. [Step 5.] We know the perfect ratio but like I said, its always best to investigate the spreads and observe their activity during different timezones. Nothing beats plotting a chart of a simple uniform spread and working around it. For example, I know that the E-minis leads the Spi therefore in all my trades I will consistently underhedge the E-minis by 30%. Instead of 10 spi to 13 eminis, I will do 10 to 10. This is because, based on feel/experience, the E-minis moves around a lot more and does a more volume. And I am assuming that the spi is wrong and the e-minis are right. So if the eminis are up, and someone has sold the spi, I want to be long spi but not fully-hedged short minis... because if they run down they should crash enough to let me out anyway. But if they refuse to come and squeeze up, I will need a lot of 'breathing room' on that leg because the spi needs to catch up. When the minis goes somewhere, it often bounces back and f*cks around as well. Also from experience, being fully-hedged and copping an e-mini reversal can be very very deadly. Real Ratio: E-minis require extra 30% contracts than spi. E.g. 10 spi to 13 eminis Based on current market conditions/ATR: A safer spread ratio is actually under-weighting e-minis by 30% so leaving it 10 to 10. You can apply this to any other spread out there as long as you believe they fundamentally follow each other over a certain time period. And most importantly, nothing beats watching the spread like a hawk every day and observing how both legs react to each other. Plot the chart, and look for value. With enough hard work you will see opportunities of cheap/expensive relative value plays. Finally, it's common to see people who spread the DAX vs. EUROSTOXX to under-hedge the DAX slightly. Even though they know the perfect hedge, they know the DAX is more whippy and can run. So if it runs onside it should flick you out, but if it runs offside it's going to do you a lot of damage and the Eurostoxx won't catch up.
Given the couple of years you've been at it, the amount of money you're apparently swinging around, and devoting all your waking hours to it .... I'm rather surprised you haven't been a little more rigorous on analysing this beyond these subjective measures.
>> No I've only done that spread since March this year but my friend who has done it for 2yrs and another for over 5yrs, helped me out and taught me a lot which I'm very thankful for. >> Like I said plenty of times, quant stuff is not my field and I am not familiar with anyone who does it rigorously. I'm a discretionary trader and that's all I know. I trade off price action, levels, momentum, correlation, relative value inefficiencies, whatever I see I trade. Whatevers working or the flavour-of-the-month I will keep exploiting until its done. >> Besides this point there is no fundamental reason why an Australian index should follow the American index exactly because they are anchored by cash. There is always left-over/follow-through orders from the cash session, as well as significant levels etc. that get broken and so it gets busy often. Theres lots of stuff to watch and observe and none of it involves getting 200 days of data and back-testing data. >> This is just 1 of 8 or 9 things I do as well. I feel putting all the eggs in one basket (only trading 1 or 2 things max) left me susceptible to enormous blow-outs and down-periods when the market changed and you wouldn't get paid for extended periods of time. I always advise others to learn multiple things, you'll never know when your bread and butter goes to sh*t and you're doing something entirely different for two-weeks while it restores itself.
Of course, no argument with a stance that says "this is what's worked for me, this is my style, etc. " Just that you have given the impression here and there in this thread that you believe you have scope to up your game. You are (seemingly) firmly of the opinion that it'll be as a result of more screen time, more action. However, measuring some of the things that you rely on, believe, experience etc., might highlight a route to P&L improvement. It doesn't require venturing into quant territory, or backtesting. That said, I have trouble accepting that true 'relative value inefficiencies' can be identified and traded without some quantitative framework. Unless we're using the terminology with different understanding
Absolutely. When index spreading in Asia, I find it useful to identify a concurrently important exogenous variable that will suggest to what extent the target index will mimic the overnight S&P500 result
Sommi, you sound legit to me. Don't know why people are giving you so much flack. Everyone around here is super skeptical and there are just a bunch of haters here, too. Keep posting. Morons here think that all traders need to be hyper methodical and completely quantitative at all times in their trading. Formally it's really more the domain of systematic and quant driven trading. Discretionary trading does exist and a certain amount of gut and experience takes precedence for these traders. Some disc traders can be extremely profitable. While they may not have drawn out or at times can even articulate why they take certain setups or exit their trades when they do, it's irrelevant. Their judgments are based on experience, which can be equally valid and sometimes in wild markets more appropriate. The most important thing i believe for disc traders is appropriate money management. As long as you keep some hard and fast rules on that then intuition in the proper hands can lead to a successful career. Some people just have a talent for discretionary trading - and that cannot always be taught or even formalized. This concept can be irritating for people to hear who want to be able to read something in a book and then become a millionaire. I guess it violates their sense of fairness or something. Good luck in your trading sir.
>> I would love to do back-testing and take on your recommendations. The problem is it costs more money for the data from the chart package and I am not familiar with any of the skills that would be needed. We got offered to get some back-testing packages and it cost $10,000 a month.. and you gotta learn the coding yourself. >> I'm seriously considering hiring someone part-time one day who is familiar with stat packages and running back-test probability. I always find it interesting and I appreciate you for opening my eyes to more things I can look forward in the future. >> I know it's difficult to contemplate trading without a quantitative framework but... every single successful guy I know is exactly like that and does not involve quant stuff at all... so I jsut learned some of their thought processes and applied them >> I'm not really familiar with specifically identifying variables besides trading it and developing a feel and experience off it. Perhaps looking at opening/closing prices and just watching how the spread moves all night. That's how I've learned everything and that's how my friends have learned all their trades too. >> Thankyou for your kind words dear friend. I know its really easy to not succeed.. but very often, people are making excuses and giving up the good fight before it really begins. >> Many people just give up and say it's the bots and they're unbeatable and mention algorithms and quants who are measuring everything statistically and finely tuning everything we do. >> I am here promising people that if you do enough hours, and spend enough time, you will find something you can call a bread and butter and develop some sort of edge. And you don't need high level statistics or mathematics to do it. It just seems many don't want to believe its true.