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I've found a 512 tick heiken ashi chart makes daytrading CL a bit less visually vulgar, which is one of the ways in which it can throw me for a loop. I do my longer term technical analysis on day charts of varying lengths of time, looking for key levels for the next trading day. Then I actually trade off a tick chart and watch the DOM when I get close to my expected range in either directions.
Can you help answer these questions from other members on NexusFi?
The storage situation and the relationship to prompt month continues to baffle me. We are awsh in crude oil, but as we saw in the last week, based upon the strength of the Apr-May spread, people would rather own April than not own it. But if we have so much crude why? And if storage is really going to fill even more, as fundamentals predict, won't May be even cheaper.
People need to remember that there is a significant difference between the cost of getting a barrel of oil (or an MMBtu of NG) out of the ground, and the cost to service debt. Debt at this point is a sunk cost and does not effect incremental production costs. I would also agree that I hear many US producers are hedged at least through the end of 2016, so the drop in prices is not really effecting them at all yet and from an earnings stand point will not for many months to come.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,059 since Dec 2013
Thanks Given: 4,410
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Interestiing video Thank You.
If anybody watch's it and has questions, post them here and I will do my best to answer them (I trade a lot of CL spreads).
It was kind of funny seeing somebody as accomplished and revered as Tom Sosnoff get confused about the naming, and sign on the spread.
For what it's worth Pete Mulmat is obviously a CME Employee. While he admits that Brent is a more important benchmark than WTI, he says that WTI is the largest energy contract on the CME. While he is not lieing saying that, he is hiding the fact that the largest energy contract in the world is actually ICE's Brent Crude contract (ICE bought the IPE many years ago). If you take a look at Brent, the contango is not nearly as steep as it is in WTI, illustrating the difference in world crude fundamentals as opposed to Oklahoma's fundamental's!
Why somebody should look into trading spreads vs outright futures? The presenter in the TastyTrade video mentioned CL futures margin being $5600 vs very low for spread. For me this is not good enough reason. I am sure there are many more benefits for trading spread.
My posts are not meant to give financial advice neither do they imply that my method is special. "THIS IS WHAT I COULD BE IF I HAD A TOTALLY CARE FREE STATE OF MIND DURING TRADING" Mark Douglas.
I will add to the mfbreakout's question couple more:
- what is the difference in trading CL spreads on Nymex vs. WTI or Brent spreads on ICE?
- do you trade exchange specified calendar spreads or synthetic spreads? Seeing you are using X-Trader I would expect you trade synthetics and working the legs, correct?
- what is your timeframe in trading spreads?
- is there any advantage in trading complex strategies (i.e. butterflies) vs. calendar spreads?
- is it possible to trade spreads technically the same way as the outrights or they are more fundamentally driven contracts?
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,059 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,226
Me and my big mouth. Well here goes...
Let me start by saying I saw A Guide to [AUTOLINK]Spread Trading[/AUTOLINK] Futures (ebook) by Rajen Kapadia* discussed on this forum somewhere. It's an ebook available several places ( eg Amazon) for about $3! If you really know very little (or nothing) about futures spreads, futures butterflied then this will get you started. It explains poisitioning sizing, spread ratio's etc etc. The writer obviously uses TTs XTrader as many of the screen shots are from that software. It's not going to make you a spread trading expert but for $3 it's decent value.
While obviously a completely different market, with completely different fundamentals there's lots of literature out there that discuss's the Eurodollar ("GE") curve. The Eurodollar future is probably the biggest futures contract that you've never heard of trading literally several million contracts a day. It's interesting to our discussion here because Globex has not only Butterfly's (1-2-1) but also Double Butterfly's (1-3-3-1) for trading as exchange listed spreads, with FULL implication.
*I have no relation or connection to Rajen Kapadia
I agree that the reduced margin does not seem like a good reason in itself to trade spreads IF you are really trying to trade CL direction-ally. The charts below show the outright price and the daily change of CLJ5 plotted against the CLJ5/K5 spread. As you can see the price movement in the spread is not a good proxy for price movement of the outright at all.
I personally think that you shouldn't view trading CL spreads as trading a less leveraged outright. I think spreads should in many ways be treated as their own market. Sure the fundamentals that effect the outrights effect spreads as well, but as illustrated above they are not always highly correlated.
Before you start trading spreads you need to start thinking about prices as a forward curve/term structure. When you trade a spread you a trade a differential between two different contract months. For lack of a better expression, trading a spread is like trading the 1st derivative of price. Spreads/The Curve/Structure are effected by many things. Obviously the closer to the front of the curve you get the more immediate fundamentals have an impact. Further back in the curve deal flow/hedging can cause some significant distortions - often temporary. This post here and it's follow up here illustrate what I believe was a temporary curve distortion. While I didn't have this exact trade on, I had something very similar.
Mentioning Eurodollar's again CME's recent education piece " CURVATURE TRADING APPLICATIONS Application #1: DIRECTIONAL TRADING" By Joseph Choi is an interesting introduction on how to start thinking about the forward curve as something other than one price, and what spreads and fly's can tell you about the markets expectations.
There are many ways you can approach spread trading, with I suspect varying degrees of success. Fundamentals, Technicals, are obvious but many of the others are very quantitative and statistical. Hedge Ratio's, Relative Value, Regression's, Butterflys, Double Fly's, Mean Reversion etc etc.
I don't trade Gasoil specifically but below I link 5 video presentations by Doug Huggins of Quantitative Markets Analysis in London. I think these give an excellent example of some "Relative Value" trades. Several in reality are a little over simplified and would have left you open to market risks that you did not want. There are actually better (but more complicated) ways to construct some of these trades and Doug even allures to that and explains why in the 4th or 5th video. These videos are all sponsored by ICE as they transition their Gasoil contract to a new Low(er) Sulfer specification but is completely transferable to any commodity with a forward curve. I didn't know Doug before seeing these video's but have reached out to him recently. He is a very friendly individual who has also greatly impressed me with his knowledge. Each video has supporting slides.
NYMEX CL is a physically delivered contract while ICE WTI is a financially settled 'copy cat' contract based upon the NYMEX CL settlement price. Hence if you trade ICE WTI you do not have the physical delivery option that you do on NYMEX. Also there is more CL or WTI liquidity on NYMEX hence if you want to trade WTI I would suggest you do it on NYMEX,
Brent is a completely different commodity to WTI. Unbeknownst to most the NYMEX Crude Contract ISN'T a WTI contract, it's actually Light Sweet Crude contract. There are long list of crudes that you can deliver into the [AUTOLINK]contract[/AUTOLINK] at varying price differentials. It get's called WTI though because that is the benchmark crude for the differentials and the crude that in reality is nearly always delivered. Similarly what we call Brent is not actually Brent any more. Brent production has declined to the point that have had to include other similar North Sea crudes. The Brent Index is now actually a BFOE index representing Brent, Forties, Oseberg & Ekofisk. (Brent in itself is actually 'Brent Blend' as it's a mixture of several different close proximity North Sea Fields.)
NYMEX's WTI contract calls for delivery to Cushing Ok. Many years ago mid-america was short crude, and hence WTI was for decades the most (or at least one of the most expensive) crudes in the world. The US imported crude and shipped it up pipelines into the midwest etc. Hence WTI regularly priced at Brent + Freight +Pipeline costs. Obviously with the change in US production, the addition of new pipelines, and the reversing of others (so crude can now flow from the Midwest to the Gulf Coast) things now look very different. Brent on the other hand is still what is called the "swing barrel" and the World Benchmark. North Sea, West Africa, Mediterranean crudes, all price relative to Brent and and flow/move to what ever area of the world has the highest prices to attract it.
ICE Brent is a financially settled vs a Platt's index. NYMEX Brent while being the 'copy cat' is also financially settled vs the same index so they are basically identical. There is more Brent liquidity on ICE though, so if you want to trade Brent do it on ICE.
Both exchanges offer exchange traded spreads, but ICE's implication is more advanced, but that doesn't make up for the drop in liquidity in WTI to justify it.
Unless your trying to execute spreads outside of the implication range you will rarely if ever get better fills by trying to leg spreads as opposed to trading the exchange listed spreads. Where X-Trader comes in useful is if you are trying to trade Condors or Butterfly's. While CME does list CL Butterfly's the implication is switched off, hence the best price available is often a price at which a HFT market maker can arb you for a tick by legging the butterfly himself.
If spread A is 10/11 and spread B is 8/9 then the AB Butterfly on legs is 1/3 (ie S 10s, B 9s =1 and B 11s, S 8s = 3). I find that using XTrader's autospreader it is quite easy to buy or sell 2's.
Most of my spreads are held for anywhere from hours to months.
Depends what your goal is. As I said earlier I don't think people should look at trading CL spreads as the same thing as trading CL outrights. Same applies for more complex strategies like Butterflies. Just like spreads can be thought of as the first derivative of price, Butterflies can be thought of as the second derivative of price. When you trade spreads you are trading the steepness of the curve. When you trade Butterflies you are trading the shape of the curve. The problem with trading Fly's, Double Fly's, Condor's etc is that they get very commission expensive unless you have very aggressive fees.
I know there are many people who trade spreads both technically and fundamentally.