Spread Trading

[PitBull]

20-Jul-11 120.95 109.3 11.65
21-Jul-11 120.3 108.7 11.6
22-Jul-11 120.35 110.15 10.2
23-Jul-11 120.35 110.1 10.25
25-Jul-11 119.35 109.35 10
26-Jul-11 120.4 110.75 9.65
27-Jul-11 119.3 110.6 8.7
28-Jul-11 118.45 110.75 7.7
29-Jul-11 116.4 110.15 6.25
30-Jul-11 116.3 109.95 6.35
1-Aug-11 114.05 109.05 5
2-Aug-11 114 108.05 5.95
3-Aug-11 112.55 105.9 6.65
4-Aug-11 110.6 104.45 6.15
5-Aug-11 107.4 99.3 8.1
6-Aug-11 103.45 95.55 7.9
8-Aug-11 101 93.8 7.2
9-Aug-11 102.95 95.4 7.55
10-Aug-11 103.9 95.6 8.3
11-Aug-11 108.25 98.55 9.7

The spread trade has been magnificent since its high of 17 on 12/07. It dropped all the way to 5 on 01/08/2011 and then moved back up to 9.7 today. Only one or two whipsaws in the entire period.
The spread gap has moved 17 points. Trades on this spread should have realized between 10 - 14 points in the last four weeks.

 

[bestnifty]

Doubt on Spread Trading

This is very interesting ! I have not gone through the all the ( spread ) threads entirely.
surely I am going to study them eagerly.
But I cannot control myself asking this because if the following thing happened the position will become a danger -what should I do ? this nagging question makes me sleepless - please offer a solution.
Short lead@105 and Buy Zinc@100 .What will happen if both of them travels in the Opposite direction ? say Lead goes to 115 and Zinc goes to 90 - not only our M2M will increase and if we close the position @ expiry our loss will be very much.
I hope you might have answer at your mind -please clarify.

 

[PitBull]

@bestnifty,
As in any trade, when the trade goes against you, you should have a stoploss which gets hit and you exit.
You can then reverse your spread immediately or you wait for the market to reconfirm which trade you should enter.

My method of trading the Lead Zinc spread is here

The spread itself moves quite slowly, often in terms of 1 or 2 points a day, so you need not fear the massive movements of the commodities markets.

 

[Mietesh]

Re: Doubt on Spread Trading

This is very interesting ! I have not gone through the all the ( spread ) threads entirely.
surely I am going to study them eagerly.
But I cannot control myself asking this because if the following thing happened the position will become a danger -what should I do ? this nagging question makes me sleepless - please offer a solution.
Short lead@105 and Buy Zinc@100 .What will happen if both of them travels in the Opposite direction ? say Lead goes to 115 and Zinc goes to 90 - not only our M2M will increase and if we close the position @ expiry our loss will be very much.
I hope you might have answer at your mind -please clarify.

BESTNIFTY,

First off all at Spread Gap of 5 I hardly see that you can make Bull Position. But if you made this then your Loss would be 5000 (1 Lot) x 20 = Rs.1 Lac. But as mentioned by Pitbull you shall not hold position so long.......need to keep Stop Loss in such Position as it will be HIGHLY NON RECOMMENDED Spread to take position. Hope you understand & if not then can ask more. To Summarize it one shall not take BULL POSITION at level of 5 and if take then do keep strict SL.

Rgds.

 

[PitBull]

Ok, long post coming up so bear with me.

I had previously said that the Lead Zinc spread trade was a work in progress and I am constantly looking at ways to improve the trade.
I have explained my previous method of trading and this method still is applicable.
1. The spread trade is a positional trade and must be looked at from EOD. Intraday trades may not work so well.
2. The two day method of entry and exit is crude but effective and my new methods are an enhancement to this method. The two day rule still stands though.

I have started using Indicators to help me with identifying the relative position of the spread and an entry/exit point.

1. The first indicator which allows me to identify the relative high/low points of the spread are Bollinger Bands.
Bollinger Bands
2. The second indicator which is used to identify buy/sell point is Stochastic RSI.
Stochastic RSI

I have not done too much back testing, only about 4 months or so , but the indicators together combine to give a solid interpretation of the spread trade.
Also my back testing is done mentally from a visual interpretation of graphs, not on paper, so I don't have exact numbers for everything.

I think this will be explained better with graphs.

This image shows the spread gap along with its Bollinger Bands. The bands provide an indication of where the spread gap is currently at in relation to the relative high/low.

The second image shows the RSI and Stochastic RSI of the spread. The RSI show us if the spread gap is at an overbought or oversold position and the Stochastic RSI is even better. It actually gives us a Buy/Sell call. Note : In this case Buy - Short Lead, Long Zinc ; Sell - Long Lead, Sell Zinc.

Comments, Questions , Discussion are welcome.

 

[sumeetsj]

Ok, long post coming up so bear with me.

I had previously said that the Lead Zinc spread trade was a work in progress and I am constantly looking at ways to improve the trade.
I have explained my previous method of trading and this method still is applicable.
1. The spread trade is a positional trade and must be looked at from EOD. Intraday trades may not work so well.
2. The two day method of entry and exit is crude but effective and my new methods are an enhancement to this method. The two day rule still stands though.

I have started using Indicators to help me with identifying the relative position of the spread and an entry/exit point.

1. The first indicator which allows me to identify the relative high/low points of the spread are Bollinger Bands.
Bollinger Bands
2. The second indicator which is used to identify buy/sell point is Stochastic RSI.
Stochastic RSI

I have not done too much back testing, only about 4 months or so , but the indicators together combine to give a solid interpretation of the spread trade.
Also my back testing is done mentally from a visual interpretation of graphs, not on paper, so I don't have exact numbers for everything.

I think this will be explained better with graphs.

This image shows the spread gap along with its Bollinger Bands. The bands provide an indication of where the spread gap is currently at in relation to the relative high/low.

The second image shows the RSI and Stochastic RSI of the spread. The RSI show us if the spread gap is at an overbought or oversold position and the Stochastic RSI is even better. It actually gives us a Buy/Sell call. Note : In this case Buy - Short Lead, Long Zinc ; Sell - Long Lead, Sell Zinc.

Comments, Questions , Discussion are welcome.

Thanks for sharing the wonderful explanation PitBull..
Highly appreciate

 

[ppandya]

Which software you use to get the RSI and Stoch RSI chart?

 

[PitBull]

Which software you use to get the RSI and Stoch RSI chart?

I use Excel and the TA-Lib plugin for Excel.

 

[Mietesh]

hello all,
whats current scenario of lead-zinc spread ? Please inform me if any position possible as i was out of touch since many weeks. Please post the levels of entry / exit & spread gaps safe position. Await for better and prompt posting from fellow members.
Thanks in advance.

 

[PitBull]

Hi Mietesh,
I am Long Lead Short Zinc currently at a spread gap of about Rs 3.
My stop is at 1.6 and target wherever it takes me.