Spread (pair) trading Futures

[waveslider]

Here are some reasons to consider tracking and trading the spread between 2 different futures contracts. This is taken from Bob Carver's Marketclues website. This guy is sharp. Basically you create an equal weight spread between 2 different contracts - one part long one part short. I would like to start a discussion on this concept. It is particularly interesting to me because, in my observations, the spreads do trend very well, and when there is a directional move, you are almost hedged as all markets will move in conjunction. Anyway - here are his points and here is the whole article:

http://www.marketclues.net/spreads.html

# Spreads eliminate the need to call market direction correctly in order to make a profit. Instead, profits are taken out of the market simply by correctly determining which index will outperform another index, a considerably easier task to many than determining whether the market itself will move up or down.

# Spreads trend extremely well for longer periods of time than the underlying market direction.

# Spreads are very margin efficient due to the spread credit given by the exchange as the daily volatility is considerably lower than an outright position. Margin efficiency can mean bigger profits from spreads than outright positions when the spread is trending well.

# Spreads are less risky than an outright position due to the fact that news will often move both sides of the spread in the same direction. Unexpected bad news would tend move the market sharply lower, but it moves both sides of the spread lower, increasing the value of the short side of the spread. This allows the spread to be held overnight, rather than day-traded, to avoid surprise developments.

[waveslider]

Important point he makes about how your margin requirement (should be) lowered if you have a proper spread on. So you can trade more contracts and the small amount the spread changes becomes a worthwhile trade.

Note he says this is mostly for position trading over longer term periods. I have found the hourly charts look nice.

I'll get some charts up soon.

[Reaver]

I am definitely going to devote some more time to looking into spreads more as I have time. That way I could have another way to cover long term trades..I have a good book from Courtney Smith on it....Unfortunately with what I am working on right now, I can't do the topic justice until I get finished with my current studies....

[Sparrow]

Very intersting stuff thanks, my questions is though which brokers allow traders lower margin requirements for spreads.

	Quote:	Market Clues
	For a one unit spread, we would have $3938 for the single ES and $7500 for the two NQ contracts, for a total required margin of $11,438 before applying the spread credit. The spread credit of 90% reduces the total to just $1,143.80.

	Quote:	Market Clues
	As you can see, each swing in value was on the order of $6000. With a margin requirement of just over $1000, the potential for profit is excellent on this spread. For example, let's assume an investor capitalizes his position with three times the initial margin requirement ($3431.40) and is able to capture about half of both swings to be conservative, or only $6000 total. That would represent a 174% return on capital. How many day-traders can claim that kind of return?

I suppose there aren't many so ROI wouldn't be fantastic but still a nice way to trade.

[waveslider]

Actually he says at the bottom, globex doesn't do this on e-minis - of course. Still it's and interesting idea.