Spread Trading: Rolling vs Daily Trades

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jimmy1jag

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Preamble

I am pretty new to spread trading (although I have invested in shares profitably in the past) and have been busy for the last few weeks off work to identify and develop the best strategy for me. My overall strategy has three prongs one of which is spread trading.

I took the advice of someone off this site and started an account with Finspreads with the minimum £100 placing trades, initially, on just about anything. I then put together my watch list centred on the NYSE and FTSE and trading at at least 1000 ( to get the benefits of movement) with a spread not exceeding 20 points. Of course, going in green and not knowing a great deal about chart patterns I lost a few bob along the way. So I'm now learning about candlestick patterns and using a couple of indicators as well; and the pattern is slowly starting to change in my favour. I've also reduced the spreads I'll accept to 15 points and I expect that this level will reduce further.

As I normally spend about 2/3 of the year away at work I recognise that I can currently only do EOD trading (the joys of a laptop with a lousy internet connection in a hotel room!!). My strategy now is to look for trending patterns amongst a list of about 15 FTSE stocks and trade accordingly. I still retain the NYSE stocks in my watch list but am not currently trading them (part of the learning process and due to burnt fingers fingers resulting from "dicking around trades" My mum always told me not to play with matches until I was old enough!). I also use a scanner (on trial right now) to identify possible set ups.

My Dilemma

The key dilemma I have in spread trading is whether to close my position(s) each day or whether to keep it (them) open until my target is reached. When things go according to plan (stop losses not being hit), the profitable trade lasts for several days.

If I'm in a "sell" position, then I receive interest overnight and my position resumes the following morning. If I'm in a "buy" position then I pay interest at a higher rate to that I receive if I'm in a "sell" position. In addition to that I put myself at risk of any sudden movements in the market overnight unless I take out a "guaranteed" order. However, on the Finspreads FTSE 100 Rolling trade, you have to place your exit at least 75 points away from the mid price (I don't know what the position is for individual stocks) and you're charged a small amount for the provelege. So it seems to me that this is very a "Heads I win, tails you could have lost hell of a lot more, but I still win type of situation".

So my questions are:

1) Has anyone carried out some sort of cost benefit analysis of "Rolling vs Daily" Trades?
2) What statistical work has been done to identify the frequency/ probability of the unthinkable (i.e. sudden unexpected high levels of movement overnight) happening? (I realise this may vary from sector to sector)
3) What are peoples views about "Rolling" vs "Daily"?
4) What about weekends? Receiving interest on sell positions sounds ok.

Many thanks in advance! :)
 
jimmy1jag said:
Preamble

So my questions are:

1) Has anyone carried out some sort of cost benefit analysis of "Rolling vs Daily" Trades?
2) What statistical work has been done to identify the frequency/ probability of the unthinkable (i.e. sudden unexpected high levels of movement overnight) happening? (I realise this may vary from sector to sector)
3) What are peoples views about "Rolling" vs "Daily"?
4) What about weekends? Receiving interest on sell positions sounds ok.

Many thanks in advance! :)
Click to expand...

I can't be home for the FT close, due to work, so have the same dilemma as you which, in my case is, what to do at 1330 when I have to go out. I am inclined to use a rolling bet, especially if my trade is up , so far, on the day, because I believe that, mostly, a profitable close means a good start the next day even though it may only be for a short period. I got 55 points that way with RB. a few weeks ago but they don't often seem to come my way as easily as that! I left a limit order for that one which got triggered in the afternoon and the rolling trade made me a couple of points at the close but the next morning was a beaut!

I just read a thread on TMF which may help you with costs.

http://boards.fool.co.uk/Message.asp?mid=9138288

At the top of the post, if you are not familiar with TMF, it says "whole thread(4)." You need to press that to read the other posts, which are interesting.

The upshot is that Finspreads seems to be very competitive and their rep reckons that a rolling bet is the more economical bet for two weeks. I haven't much experience with index trading but see that Fins. have reduced their spread to two points so may take a look.

Weekends? The Libor charge doesn't influence my decision on that score at all. I'll stay open or close for other reasons.

Keep posting, very interesting.

Split
 
Thanks for that Split.

From that thread it looks as if I'm already with the right provider re- interest rates!

That 2 point spread on the FTSE is attractive and runs until market close in the US.
 
I've rolled bets accidentally - hanging on a bit too long before closing, or typical family crisis at just the wrong time - and I've done it on purpose a few times (less than 10 say), leaving a stop and a limit order in, and I did it regularly trading the 'Dec Future' and suchlike when I was first 'learning' about spreads.

Now I won't do it, because the risk:reward is appalling... what are you looking to make at £1/pt rates from a trade? (You may be staking more than this, or less with some, but it's immaterial as risk:reward is a ratio and therefore as long as wins and losses are described to the same stake it works for any amount of course). Say I trade Intel, which I do quite often - it's at $24 or so right now, and lately I'd say a $1 move was pretty good going - I can make £100 from that. Intel puts out a profit warning - and it can happen to the best - and they drop to $18 or even lower... I've held overnight trying to make £100 over 2-3 days, and lost £600.

Add in the relatively high leverage and you've probably not got the cash in the account to cover an event like this - I got a mailshot the other day trying to get me to buy a method to time trades, the item traded gapped down $230 in a day, that's a £23,000 change to the trader... the mailshot hooted about this immense 'win' and seemed oblivious to the idea that it might have gone the other way instead.

If trading stocks you aren't going to see a $230 drop I guess, but $10 is quite possible on shares - that's £1000 of unexpected gap, and if your account doesn't have that cash in it then you get a margin call... if you aren't in (a problem many of us moan about) you'll be closed out owing money. I've decided that whilst I am often confident my trade is going the way I planned I would rather exit and take a loss even rather than risk an unexpected event costing me far, far more than I expected to win.

If you have deep pockets then fine, to me it really is a case of risk:reward - to my mind an overnight hold opens you up to the possibility of too great a price move whilst being unable to exit the position. I've actually got a couple of gaps 'right' recently, and exited without enjoying the results... not once have I cursed at having exited before the 'win' I might have trousered, because I'm well aware that I might well have seen it go the other way too.

I think it's fair to say the maximum risk you are likely to actually run is not a long trade going to zero, or a short doubling in price, but a 50% move against you must be considered possible... in 5 years I've only had one trade move that far on me overnight, discounting 9/11, but I've had several exited bets move $5-10 on the night after my exit in the past year.... getting any one of them wrong would have been painful enough!
Dave
 
DaveJB said:
I think it's fair to say the maximum risk you are likely to actually run is not a long trade going to zero, or a short doubling in price, but a 50% move against you must be considered possible... in 5 years I've only had one trade move that far on me overnight, discounting 9/11, but I've had several exited bets move $5-10 on the night after my exit in the past year.... getting any one of them wrong would have been painful enough!
Dave
Click to expand...

Hi Dave,

I don't want us to frighten new guys off. Things have to be put into a proper perspective and SBetting is mostly about gearing, isn't it? Nevertheless, if one has a portfolio of companies of 2000 shares per company, each company will vary by £20 per penny . Therefore, a £20 bet will carry the same risk as any other share in the portfolio and the fall of any one of them will carry the same loss as the bet. I lost £5000 in a company once when it went broke and that was before SB companies existed. It hurts just as much!

The problem here is that traders are inclined to go in and out of bets more often than they are shares, but I suggest that it is more their fault rather than that of the system.

Another point that I would like to make is that a £1 bet on a £2 share is going to carry a maximum risk of £200 if the company goes bust , so I suggest that the real minimum riskers should work at the minimum end of the price range than the top end. An £18 share could risk a total of £1800 if the company goes bust. This is part of the money management thing with which spreadbetters have to come to grips.

Now, I know that the price moves on expensive shares are tempting and that the rewards are great for those that get it right for daily moves on RBS and RIO but one has to walk before he can run and my advice is ALWAYS work out how much the loss will be if the share goes bust.

Split
 
Yep,
wouldn't disagree - I'm trading US stocks, and basically the cheap end of the market there is more like $15-25, assuming a profit warning rather than bankrutpcy event causes a 50% drop that's £750 - £1250 loss on the rolling bet.

My initial point, however, still holds - the risk:reward is awful. Large gaps aren't all that uncommon, and for a spreadbetter with a small account a single such gap will see a margin call. You could argue that the gap might go in their favour - that makes the gap a 1:1 risk:reward... that's still poor odds.

I just don't think the average trader is going to be too happy when it happens, and the longer you stay in the closer the next one gets!
 
Many thanks to the pair of you for plenty of food for thought.

Reading between the lines of what has been said, you obviously need to do your research before putting your money anywhere, to include assessment of the frequency that adverse gaps for each stock you trade. To quote from somewhere, "Know your market like the back of your hand!"

"I just don't think the average trader is going to be too happy when it happens, and the longer you stay in the closer the next one gets!" - even if your pockets are deep. I guess one can draw an analogy with accident free driving. There is always a chance that you'll have a crash, but so long as you know what the risks are and take appropriate preventive action, you have a reasonable chance of having accident free driving.

Moreover, you DO need to be totally aware of you TOTAL exposure and not just your stop loss exposure.

Point taken by me and lesson learned before a fall. I'll put that into the trading plan!

____________

However, if you trade the FTSE index on FS, you able to trade until close of markets in the US, thereby being able to keep an eye on some of the out of hours trading patterns.
 
J1J,
yep - the only thing I'd add as a caveat is that like in driving, YOU can be a brilliant driver, it's the idiot coming the other way that kills you... so too with gaps, especially the profit warning . I harp on this somewhat, as contrary to popular belief even major companies get hammered over the short term... which is all an SB type can afford to be hundreds of points down over.

I'm not naturally as doom mongering as this, for myself I've just concluded that whilst it is very attractive to keep a trade rolling over to pick up the profit you are sure is coming, on the whole I have to say that a single bad adverse gap would quite likely wipe out the extras I'd picked up on the rolling trades that didn't gap. I think it'd be good to see a 'limited risk' bet option - where you could set a limit whereby you might say '$2' and if it gaps more than that... whether in your favour or against ... the bet closed at that distance from entry. That would be fair to both SB company and the punter who wanted to hold a position open.

The adverse gap isn't going to be occurring weekly, but it's surprising how many shares in the big caps move large amounts overnight, and if you are trying to steadily build your pot up by sustained, good trading (the sort I'd like to get the hang of <g>) then even a 'big gap winner' should give you cause for concern, as it might just have gone against you instead.

It's funny that we decry "gambling" (dogs, horses, casino) and insist we are trading, yet with most betting your risk is limited to what is on the table, with SB it can far exceed what you thought you had. Whilst in an intraday trade the chances of a catastrophic adverse move is so small, I would suggest, that it's reasonable to ignore, my only reason for this 'don't hold overnight' stance is that you cannot exit for long periods even if you are watching out of hours trading etc. In fact I suspect many, like myself, are SB'ing with companies that don't quite match the market hours.... so you can watch a datafeed showing 'actual market' movement (rather than out of hours) and you STILL can't exit or take profit etc. Been there, got the T-shirt!
 
DaveJB said:
on the whole I have to say that a single bad adverse gap would quite likely wipe out the extras I'd picked up on the rolling trades that didn't gap. I think it'd be good to see a 'limited risk' bet option - where you could set a limit whereby you might say '$2' and if it gaps more than that... whether in your favour or against ... the bet closed at that distance from entry. That would be fair to both SB company and the punter who wanted to hold a position open.
Click to expand...

You can do this already, albeit in a restricted manner, courtesy of the guaranteed order; although I will allow myself to be corrected! :)
 
DaveJB said:
J1J,
I'm not naturally as doom mongering as this, for myself I've just concluded that whilst it is very attractive to keep a trade rolling over to pick up the profit you are sure is coming, on the whole I have to say that a single bad adverse gap would quite likely wipe out the extras I'd picked up on the rolling trades that didn't gap.
Click to expand...

For those of us only able to trade outside of trading hours, placing orders daily is a way round this, albeit at the cost of points lost to cover spreads each day. Although it does reduce the level profits you can achieve, it does mean that risks are considerably reduced, thereby reducing both sides of the risk / reward equation.

And looking at specific mining example, which I have a strong interest in, RIO suddenly becomes a lot less attractive for the sake of, let's face it, being greedy for the few extra points you're afraid you might lose out on.
 
The dangers increase with the increase in the number and value of shares traded and the amount of shares traded. This seems to be an obvious statement but overambition and greed are the big threats to wealth depreciation. I repeat that gaps are just as likely to happen in one's portfolio of shares and that spread bets should always be used in the same proportion as the profit gain per penny that you shares have.

Split
 
Just to add to the many sound comments regarding risk. I have been trading for many years and have accounts with 3 SB companies, including Finspreads.
Personally, I always calculate the risk of the spread and the stop I place. In other words I set myself a 3% risk (you can use whatever is comfortable for you). That way you know where you will close the trade before you enter it.
Regarding rolling or futures, again I never use rolling bets where you may be charged for the privilege! IG are terrible for that, Deal for free are superb!
For me your dilemma is not the rolling or future question, I would recommend that money management is more important.
I have created a spreadsheet that I will gladly send that calculates the amount per point based on the 3% risk, the spread and the actual account balance. Means that you are always entering a position on very clinical terms.
 
Euro_d said:
Just to add to the many sound comments regarding risk. I have been trading for many years and have accounts with 3 SB companies, including Finspreads.
Personally, I always calculate the risk of the spread and the stop I place. In other words I set myself a 3% risk (you can use whatever is comfortable for you). That way you know where you will close the trade before you enter it.
Regarding rolling or futures, again I never use rolling bets where you may be charged for the privilege! IG are terrible for that, Deal for free are superb!
For me your dilemma is not the rolling or future question, I would recommend that money management is more important.
I have created a spreadsheet that I will gladly send that calculates the amount per point based on the 3% risk, the spread and the actual account balance. Means that you are always entering a position on very clinical terms.
Click to expand...

A stop will not be of any use in a panic fall. The price will go right through. Guaranteed stops are too expensive for me to consider, they just add negatively to the risk/reward factor that Dave mentions.

:D Hey! Let's be cheerful! Just work out the maximum loss possible and it probably won't happen. Just don't go putting 20 quid on RIO at 18 quid per share and the like, without doing your sums.

Split
 
I agree that in a panic fall of catastrophic proportions the stop will fail. Also I agree that guaranteed stops are "expensive" but if you are not happy with risk then build the guaranteed stop spread into your calcs and then you are home and dry.
Hey, who said making money was easy?
Dave
PS are you a Brit in Spain as I am?
 
Euro_d said:
I agree that in a panic fall of catastrophic proportions the stop will fail. Also I agree that guaranteed stops are "expensive" but if you are not happy with risk then build the guaranteed stop spread into your calcs and then you are home and dry.
Hey, who said making money was easy?
Dave
PS are you a Brit in Spain as I am?
Click to expand...

After this thread I've lost all enthusiasm for trading today! :(

I'll give guaranteed stops some thought, instead.

Yes, I 'm a blown away Londoner.

Split
 
Splitlink said:
Another point that I would like to make is that a £1 bet on a £2 share is going to carry a maximum risk of £200 if the company goes bust , so I suggest that the real minimum riskers should work at the minimum end of the price range than the top end. An £18 share could risk a total of £1800 if the company goes bust.
Click to expand...

This is assuming of course that you're going long.
It's unlikely (but still possible) that if you're short on a £2 stock that it could more than double and your losses would be more than £200.

Edster
 
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