Inter-Indicies Spread Trade

Investor123 · 12 September 2008

Current market is too volatile to make directional trades, I prefer to trade inter-indicies spreads.

Nasdaq / Dow Jones ratio is pointing down after peaking the resistance of 0.21. To tap on this trend I had shorted 1 lot of Nasdaq mini and had bought 1 lot of Dow Jones mini.

Shorted 1 lot of Nasdaq mini Dec08 at 1744.25
(Value of 1 point is $20)

Bought 1 lot of Dow Jones mini Dec08 at 11281
(Value of 1 point is $5)

mazzatelli1000 · 12 September 2008

So in effect you a pairs trading

To me trading of just the graph of the ratio itself is not enough

I believe it would be more important to see if it was mean reverting and determining how far a standard deviation from the mean would be a good time to enter a pairs trade.

Perhaps more explanation to your trade would be nice (only if you want to)

auric · 12 September 2008

not sure if that graphs right here is mine 20 times nq minus 5 times ym spread chart except long NQ and Short YM with st dev bands

Investor123 · 13 September 2008

mazzatelli1000 said:
So in effect you a pairs trading

To me trading of just the graph of the ratio itself is not enough

I believe it would be more important to see if it was mean reverting and determining how far a standard deviation from the mean would be a good time to enter a pairs trade.

Perhaps more explanation to your trade would be nice (only if you want to)

Yes I am nice.

In my view as long as the Nasdaq / Dow Jones ratio chart keeps going down, I will profit.

As for the risk issue, risk level in a spread trade is already much lower compared to a directional trade, so I am not concerned about the standard deviation.

Hope I have answered your question.

Investor123 · 13 September 2008

Update on my spread trade

Trade details:
Shorted 1 lot of Nasdaq Dec08 at 1744.25
Currently Nasdaq is trading at 1782.00, loss is US$755.
(Value of 1 point is $20)

Bought 1 lot of Dow Jones Dec08 at 11281
Currently Dow Jones is trading at 11466.00, gain is US$925.
(Value of 1 point is $5)

Net profit for this spread trade is 925 - 755 = US$170.

auric · 13 September 2008

thanks for being nice investor i agree with you that with the nature of the market spread trading is the safest choice, i am just looking into spreads , etc hope you keep us informed with your current trade,not much material out on spreads for the retail trader,
cheers and good trading

mazzatelli1000 · 13 September 2008

Investor123 said:
Yes I am nice.

In my view as long as the Nasdaq / Dow Jones ratio chart keeps going down, I will profit.

As for the risk issue, risk level in a spread trade is already much lower compared to a directional trade, so I am not concerned about the standard deviation.

Hope I have answered your question.

okay - looks live you have determined the resistance point (which looks like it is at its highest deviation above the mean) to jump in the trade and looking for it to mean revert (which is why you say as long as it goes down you will make money). By choosing to enter at this point, the likelihood of mean reversion is high.

Otherwise the perception may be that if there is any little deviation between the pairs you have chosen you can jump in as "spreads are low risk".

My personal exit criteria is when that ratio hits its mean.

Also with your graph it is spanning over years, how long do you plan to stay in this trade??

Investor123 · 13 September 2008

mazzatelli1000 said:
okay - looks live you have determined the resistance point (which looks like it is at its highest deviation above the mean) to jump in the trade and looking for it to mean revert (which is why you say as long as it goes down you will make money). By choosing to enter at this point, the likelihood of mean reversion is high.

Otherwise the perception may be that if there is any little deviation between the pairs you have chosen you can jump in as "spreads are low risk".

My personal exit criteria is when that ratio hits its mean.

Also with your graph it is spanning over years, how long do you plan to stay in this trade??

I havent decided how long I plan to stay in this trade. But I think the probability of winning in this trade is high.

Nasdaq was more resilient in this downturn, does this mean technology sector will not be affected by recession? Of course not.

So for Nasdaq to fall is just a matter of time. At the same time I do not want to exposure too much into market risk, so I bought Dow Jones at the same time, creating a spread.

auric · 13 September 2008

here is your trade charted using norgate eod data

long ym short nq will be interesting if it reverts to the mean or moves out further the channel is 2 stdev of the linear regression over 148 period

Investor123 · 13 September 2008

auric said:
here is your trade charted using norgate eod data

long ym short nq will be interesting if it reverts to the mean or moves out further the channel is 2 stdev of the linear regression over 148 period

View attachment 23946

Another interesting spread trade is:
Buy near month copper contract and sell far month copper contract
Do this trade towards the end of the year.

The rationale is that most of the time copper is in backwardation, only towards the end of the year where demand is flat copper will be in contango stage. At that time its the best time to bet that copper will shift back to backwardation condition towards Mar next year.

You can search for "Safe Strategies to trade copper" in my website. It has a more detailed information in there.

Investor123 · 13 September 2008

If you do not understand what is contango and backwardation.

I had written an article about them in my website, search for "Must Know Concept for Commodities Trading".

I had given some explanations plus illustrations using contract tables of gold and copper inside the article.

auric · 16 September 2008

seems to be coming back to mean
chart ym nq spread close 15th sept

rub92me · 19 September 2008

Just a question on your position sizes. Wouldn't you want a position sizing that is normalised in the sense that a similar percentage change in either index translates into roughly equivalent associated dollar impact of your positions, or have you skewed this deliberately?

In your current situation if the Nasdaq goes up 5% (say 85 points) your impact is 85 x 20 = $1700. If the DJ goes down 5% (say 560 points) your impact is 560 x 5 = $2800. Seems to be some imbalance there...

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