When doing spread trading, it is a large part of whether you are nicely profitable or not. In fact, if you come into a pro/prof firm as a spread trader, often the deal they cut you on comission is even better than most if you negotiate as such. nitro
what is your average holding time and what is the best win and worst loss you have ever had doing the spread ?
Holding time is anywhere from a few seconds to 2 days. The shorter the holding period - the less risk, so my goal is many small gains vs. the occasional larger loss. Best gain is about 13 dow pts ($65 per contract), worst loss about 25 dow pts., avg gain about 7 pts, avg loss about 20 pts, although the target is about 10/1 winners to losers. Costs are between 1-2 pts per spread r/t. Each pt = $5 per contract. I have no faith in past performance numbers as an indicator for future results, so I don't use them to calculate risk or anticipated returns. Rather, I assume risk is directly related to the length of time the position is held (shorter is always better), so what is of primary importance is variance of the spread vs. costs (commissions). aka the "Arbitrage band" Hope I didn't get too esoteric here!
I have done ES/YM and SPY/DIA. Currently I do the futures due to lower costs, better tax treatment, and the fact they are all-electronic. I enter both sides simultaneously using MKT orders, to ensure I get in on both sides.
Spread is in the 0-5 range and I'm long at about 18. Was moving against me for a few days, but a little improvement today. I've been staying out of it pretty much until things improve. This is the result of a downward trend in the spread price that started last Monday. Also, I have seen the S&P leading the Dow lately. Since the spread price is S&P/Dow - you may expect the spread price to go in the same direction as the overall mkt. (The goal here is no direction risk, so I wouldn't bet money on this, but it is something to consider) We are getting quite oversold at this point, so a relief rally may provide an opportunity to gain some on a long spread position. For this reason, I am holding my long position, but not quite comfortable enough to double up on it yet.
Sold today at 26, short at 26. Range is 20-40. Will double up on the short if it gets up to around 50 or so.
Hi esctrader, I have been enjoying reading your interesting thread. I just wanted to ask whether your strategy can be made fully mechanical or are there discretional elements to it? Also, is it possible to back test your approach over several years of data? Cheers
Hello esctrader, I was wondering whethre you would be willing to outline the strategy you use. I am personally totally unfamiliar with spread treading although I am very familiar with technical analsis and fundamental analysis. Its only natural to be curious about something one has not seen before. However if you dont feel like saying then thats fine. Thanks anyway for such a fine thread.
Yes, this strategy could be mechanized. Off the top of my head, I would chart the spread price and buy/sell the spread when it hits the bottom/top of the Bollenger bands. Also I would scale in and out. First Alert has excellent spread capabilities, if it has an automated trading feature that would probably be ideal. I haven't seen much else among these cheaper programs that compares favorably. I'm a little wary of backtesting for a couple of reasons. If we truly believe that "past performance is no indicator of future results", then it follows that backtesting has no value. I wouldn't go quite that far, but I think it's value is generally overrated and harmful if we are to have too much confidence in it. Also, a problem with looking at data for spreads is that most times the LAST price is used, and for spreads this is misleading. What we need to look at is the BID price of the leg we are selling and ASK price of the leg we are buying at a certain point in time. If you have T&S data with (Time and BID ASK), and not just (Time and LAST), this would be useful. Otherwise, it would be helpful to look at the chart of the spread price plotting two lines, the BID and ASK price of the spread. BID line = (S&P ask - Dow bid), ASK = (S&P bid - Dow ask). Again, LAST or trade price is not useful in this calculation.