Barjon's Money Machine

or the FTSE/DOW pair via SB


A bit ago CV suggested I put up to shut up (an argument progressing on some thread I can’t remember), so here’s the bare bones for your delectation and delight.

Not a trace of vendoring in sight – which should please pee bee and scose

Not based on any TA – which should please toastie

An itsy bit of randomness – which should please hare

Some mean reversion – which should please rob

Live trades on ftse futures thread (you have to hunt**) – which should please flashy and joe

No statements though – which won’t please joe at all

And no lulz – which won’t please a whole bunch of people

** latest here http://www.trade2win.com/boards/uk-indices/120172-anyone-scalping-ftse-futures-1298.html#post1917008 which is underwater at the moment (no cherry picking )

ok, have at it gang

jon

The lulz will come...

Interesting stuff - how does it work with fills on the FTSE? Damn market is thinner than Kate Moss on Atkins...

Also - how do you actually get in & out? Are you using a spreader or handling it manually?

DionysusToast said:

The lulz will come...

Interesting stuff - how does it work with fills on the FTSE? Damn market is thinner than Kate Moss on Atkins...

Also - how do you actually get in & out? Are you using a spreader or handling it manually?

Click to expand...

All manual, toastie, and a good fill doesn't have the same imperative as it does for you.

John - in a stat arb strategy such as this, is it not important to get good fills on entry & exit?

You are playing the spread, any slippage will effectively narrow the spread you are playing.

s'why I've never bothered

DionysusToast said:

John - in a stat arb strategy such as this, is it not important to get good fills on entry & exit?

You are playing the spread, any slippage will effectively narrow the spread you are playing.

Click to expand...

No it doesn't matter if you are holding for hours/days. The spread at a bucketshop will be tiny compared to the trade result. For the intraday index arb guys they are mainly automated on the lower timeframes the fills are important in that space. the majority of HFT arb index guys are flat end of day for reason I won't go into.

Well another reason I didn't bother is cos of the roll costs which I thought would make the strategy unemployable from an economic pov. Obv not if BJ is doing it.

DionysusToast said:

John - in a stat arb strategy such as this, is it not important to get good fills on entry & exit?

You are playing the spread, any slippage will effectively narrow the spread you are playing.

Click to expand...

Yes, but if I'm playing for a net +20 (say - what I aim for varies on current "relative" volatility and longer term strength or weakness "trend" in ftse if you see what I mean) the odd point here and there is not crucial.

Since I have to close manually and can't therefore close both at precisely the same time I can lose a few points in a fast market. Try to cater for that by closing the contra direction first. eg: if the market is hurtling down close the long first.

scose-no-doubt said:

s'why I've never bothered

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Dont take this the wrong way scose but the above is bollox it's not the REAL reason you don't trade, be honest with yourself man! Unless you can work out the core reason why you don't trade and debunk it you will never succeed.

barjon said:

Yes, but if I'm playing for a net +20 (say - what I aim for varies on current "relative" volatility and longer term strength or weakness "trend" in ftse if you see what I mean) the odd point here and there is not crucial.

Since I have to close manually and can't therefore close both at precisely the same time I can lose a few points in a fast market. Try to cater for that by closing the contra direction first. eg: if the market is hurtling down close the long first.

Click to expand...

Nothing wrong with manually legging in and out Jon. Plenty of spread futures traders use a bit of tradecraft to leg in and out manually.

DionysusToast said:

John - in a stat arb strategy such as this, is it not important to get good fills on entry & exit?

You are playing the spread, any slippage will effectively narrow the spread you are playing.

Click to expand...

I hear this quite a lot and maybe I'm misunderstanding the point totally. If I close a position at anywhere between 10-30 points from where I entered I don't mind paying a 1 point spread. I've had slippage yes but both positive and negative and never by anymore than 2 points.

Have I got the wrong end of the stick because I hear this so often "the spread will eat your account" so on and so forth.

You use the same broker for both legs, Jon?

Hi Barjon

Thanks for posting this. I am a big fan of spread trading a few months ago I read the below book, which is an excellent overview.

Amazon.com: The Complete Guide to Spread Trading (McGraw-Hill Trader's Edge Series) (9780071448444): Keith Schap: Books

Spreads are a great especially for beginners or struggling traders as they are more forgiving. They take out all of the emotion of trading one instrument and let you play the mean revert which is another mans strong trend. So if we know a spread is strongly mean reverting of course on a lower timeframe it will be trending towards the mean. spread trading is powerful especially if you cut your losers short and 'look to hit singles not home runs' that's a quote from the book above.

scose-no-doubt said:

You use the same broker for both legs, Jon?

Click to expand...

yes, if I didn't there'd be a greater lag in closing I suppose unless I ran it on two pcs as well. As I said though it's not crucial and I can't recall it being significantly damaging in the three or so years I've been playing with it.

Soloquan said:

Have I got the wrong end of the stick because I hear this so often "the spread will eat your account" so on and so forth.

Click to expand...

If you assume you have no edge, then spread will eat the account. A good example would be taking random trades, long or short on the toss of a coin. You'll win some, you'll lose some, and over a sufficiently large sample size you'll break even. In that scenario the spread will eat the account.

Although people don't like to admit it, the majority of technical based systems are no better than a coin toss in terms of edge, and therefore, they suffer the same fate.

Most new traders perform significantly worse than a purely random system, and their own incompetence is generally a bigger factor than the spread.

Spreads are the brokers edge, and its a MASSIVE edge, and overcoming that edge is far more difficult than most here would care to acknowledge.

the hare said:

If you assume you have no edge, then spread will eat the account. A good example would be taking random trades, long or short on the toss of a coin. You'll win some, you'll lose some, and over a sufficiently large sample size you'll break even. In that scenario the spread will eat the account.

Although people don't like to admit it, the majority of technical based systems are no better than a coin toss in terms of edge, and therefore, they suffer the same fate.

Most new traders perform significantly worse than a purely random system, and their own incompetence is generally a bigger factor than the spread.

Spreads are the brokers edge, and its a MASSIVE edge, and overcoming that edge is far more difficult than most here would care to acknowledge.

Click to expand...

Equivalent to the '0' on a roulette table is essentially what you're saying?

the hare said:

If you assume you have no edge, then spread will eat the account. A good example would be taking random trades, long or short on the toss of a coin. You'll win some, you'll lose some, and over a sufficiently large sample size you'll break even. In that scenario the spread will eat the account.

Although people don't like to admit it, the majority of technical based systems are no better than a coin toss in terms of edge, and therefore, they suffer the same fate.

Most new traders perform significantly worse than a purely random system, and their own incompetence is generally a bigger factor than the spread.

Spreads are the brokers edge, and its a MASSIVE edge, and overcoming that edge is far more difficult than most here would care to acknowledge.

Click to expand...

All very true, hare. It's perhaps worth pointing out at this stage that I'm simply not going to be drawn on how this has done for me over the three years or so, other than to say I wouldn't have posted about it if I didn't think it deserved worthwhile consideration.

People will have to add their own flesh round the bones and test it themselves if they are interested, although I'm happy as Larry to answer questions about how I do it.

barjon said:

And no lulz – which won’t please a whole bunch of people

Click to expand...

Sorry Jon, just had to do this

robster970 said:

Sorry Jon, just had to do this

Click to expand...

and it took you 18 replies. You're slipping.

Soloquan said:

I hear this quite a lot and maybe I'm misunderstanding the point totally. If I close a position at anywhere between 10-30 points from where I entered I don't mind paying a 1 point spread. I've had slippage yes but both positive and negative and never by anymore than 2 points.

Have I got the wrong end of the stick because I hear this so often "the spread will eat your account" so on and so forth.

Click to expand...

Hey solo

Paying 1 point/tick and shooting for 10 is way too much for me if using a bucketshop. You would have to have a massive edge to overcome that spread. For me I would only use a bucketshop for 30 point target with 1 point spread, that's just me others may disagree. If you are trading the futures you can try and buy at the bid sell ask but the spread may move out of line waiting for a fill, then if you do get a fill you have to manually 'leg' into the other side. You could use a spreader like xtrader/cqg but you are probably looking at £500 to £800 pm software costs.

To illustrate the effect of the cost of execution (spread, commission, exchange fees) I know of a ES trader who does 10,000 lots per day. sounds a lot and it is but he trades with a 50 lot and goes in and out of the market 100 times per day. Mean reverts and averages in once, twice but never thrice. his winners are 2-6 ticks, losers 1 to 5 ticks he makes an average of $1 per contract traded. Tick size is $12.50. So he makes like 8% of one tick per trade! with a retail round turn cost of $2-$4 you can see how he would get killed by execution costs. Due to volume and trading through an exchange clearing prop firm his all in round turn cost is around 40c. I say he makes $1 per contract, he is salaried plus small % of performance.

I know this is an extreme example but it has 2 'lessons'

1. Best not to trade where total execution cost relative to your target is large, it's a personal judgement, don't underestimate the total cost of execution be it bucketshop spread, futures commission, exchange fees etc.

2. More importantly there ARE pro traders out there who are making money from people not paying attention to point 1 as shown by my example above of the guy doing 10,000 per day ES volume. they make money from what they call 'liquidity monkeys' who trade with retail commissions and tight stops.

Sorry for the ramble that's what happens when you get stuck on a train!

Good trading everyone.