Okay, just a bit of an update.
Yesterday, some of more experience traders on the floor came out our group because they hit their daily profit limit or something and anyway they came to trade on our accounts.
The guy that traded on my account was suppose to be one of the best trader on the floor and after watching him and speaking to him, it kinda hit me on the head how I have been looking at it all wrong and how spread trading should be done.
The thing is I started off as a value investor and a Warren Buffett disciple before the internet boom drawn me to the dark side of easy money trading rather than investing. But I still mainly use my figuring out news & information and how they affect financial products as my edge. I also used TA and learnt price action as well but my main idea of trading was based on fundamentals. That I can see things better than others do can predict how financial products move is what makes me money.
But the spread trading the other hand... it has no logic because it is so hard to predict why Euribor moves faster than the Schatz v.v.
When I spoke with the guy, he basically told me his way of trading was totally on price action and not even TA. In fact, a lot of the traders there don't even know anything about TA including my line manager and it is all about price action.
So whilst I was trying to figure out how to get the best price sitting and waiting for a good price to come along, that super star trader sat at my desk for like 30 minutes and made about half a dozen trades and make a half tick here and a one tick here and was in and out of trades like no ones business and made money super quick. He even said he doesn't care too much about what price to get in.
Basically, what he was doing was scalping the Schatz and scalping the Euribor rather than trying to make money from actual spread moving in the right direction.
He was leaning the the Euribor and Schatz all the time and make some funky **** moves just to earn half a tick here and there.
Maybe if I give an example, suppose the spread doesn't move and the Euribor and Schatz moved pretty much in synch with each other. You buy Schatz at 10 and sell Euribor at 10.
Now the Schatz move in half tick whist the Euribor move in one tick. So if the Schatz moved half a tick, he would sometimes get out of the trade and take the profit and than if it moves back he buys the Schatz back even tho the Euribor hasn't moved or another move would be he is leaning on the Schatz and bought it and then immediately place a sell order above it to make half a tick without even buying the Euribor. But if the Schatz doesn't move up another half tick to take profit he would quickly buy the Euribor to 'hedge' his position.
Basically, there is the fact that the spread mean reverts to make money from spread trading but a large part of his profit comes from scalping and using 'the hedge' in case his moves don't pull off.
A way to look at it is that he was just scalping one product outright and used the other product in case it doesn't work out as 'hedge'. I use 'hedge' here loosely because it depends on the two product moving relatively in line with each other and recently it just hasn't been doing that.
The way I see spread trading is like a computer game. No knowledge of the market is required but just skill in seeing the way price move and quickly take half a tick profit here and there. Maybe I am being to simplistic since apart from price action, there are indicators like the indices, prices of Bobl and Bund etc that will help predict the moves of the Schatz and Euribor to help with the scalping and also if you watch the Schatz and Euribor enough you can get a feel of where the spread is moving.
These last few days I have been making good money because the spread has been ranging well at last. But so far in the last month, the spread doesn't mean revert enough on a daily basis and rather mean revert more on a few days basis. Because us newbies weren't allowed to leg in much at the beginning and were only able to buy at market prices, we could only rely on playing the spread moving in the right direction to make profit. But since it hasn't been mean reverting daily we are finding it real hard to make money when we try to day trade it.
The last few days I have been staying behind to try to learn to scalp properly since bonds pretty much close at 4pm and they move really slow so I can practise and have been making good money. I have much more success doing that then actually try to predict how the spread moves. I tried some of the guys funky moves this morning when the market was in full flow and I fell flat on my face losing a bundle so some way to go to getting it in proper market conditions.
Spread trading in a nut shell is like learning a technical skill or like I said a computer game moving blocks around rather than actually needing too much analysis. You really don't need much understand of what you are trading.. it can be teddy bears for all that matters and I do feel like I have lost my main edge in trading doing it.
Idk. I am learning it and think will help for my trading. I just think it is too much work when at times like now, it is way easier.. at least for me to outright the Schatz and making 8 ticks+ in one go. I think when market is volatile and you have good understanding of the market, there really is little reason to scalp and it is only when market is calm and you can't get any action in outrights then spread trading is useful.
Sorry, a lot of jumble thoughts. I am still trying to get my head around what the guy did to make money. Maybe give another update when I have figured it out properly. At least now I can actually see the spread trading model which is completely different to how I trade before.
