Spread Trading - Strategy & Calculation -Commodities

c.trader

Active Member
#1
Spread Trading - Strategy & Calculation -
Commodities
There are two types of strategies for Spread: Bull
Spread & Bear Spread
Bull Spread
This strategy is applied when the spread gap
between the two contracts (Gold Far month
contract – Gold Near month contract or Lead Oct
contract – Zinc Oct contract) is more or widen.
Bear Spread
This strategy is applied when the spread gap
between the two contracts (Gold Far month
contract – Gold Near month contract or Lead Oct
contract – Zinc Oct contract) is less or narrow
(gap between the two contract become “Zero” or
“negative” figs.)
Calculation:
Here, I’m taking the example of spread between
the Lead & Zinc (my favourite one):
First take the historical data for last one month
from MCX website (mcxindia.com – Market Data
– Bhav Copy – Bhav Copy Commoditywise)
Then take the spread gap between the closing
price of each day (Spread Gap = Lead Closing
Price – Zinc Closing Price) for last one month
Take the "Average" of those spread gap of the
closing prices and also the "standard Deviation"
of those spread gap of the closing prices for last
20-25 days.
Now we will have two figs. That is “Average” &
“Standard Deviation” .
Now comes the final part that is the decision
making and implementation of Spread strategy:
Bull Spread Range = Average + Standard Deviation
If the spread Gap > Bull Spread Range, then we
will go for Bull spread strategy. It means we will
Sell the far month contract or Lead contract and
Buy the near month contract or Zinc contract.
Bear Spread Range = Average - Standard
Deviation
If the spread Gap < Bear Spread Range, then we
will go for Bear spread strategy. It means we will
Buy the far month contract or Lead contract and
Sell the near month contract or Zinc contract.
Important point:
I have attached an Excel file: Spread Analysis –
Lead & Zinc for your reference to understand the
calculations.
For calculating the spread gap between the two
contracts, I always subtract from Far month to
near month contract for spread calculation. If you
will change this calculation scenario then your
strategy will also change.
For lead & zinc spread, I found that there Bull &
Bear spread gap is around Rs. 2.5 to 0 even to
-0.5. Any time if you find a spread gap of Rs. 4 to
5 or Rs. -2 to -3 will be a very good opportunity
for spread in Lead & Zinc.
For Gold, Bull & Bear spread gap is around Rs.
140 to 80/70.
Same way you can find the spread gap for other
commodities also. Continues study and watch will
help you to understand the spread gaps for
different commodities.
If anyone can have it live for intraday then it will
be a very good opportunity .
 

PUCHU_2500

Well-Known Member
#2
Spread Trading - Strategy & Calculation -
Commodities
There are two types of strategies for Spread: Bull
Spread & Bear Spread
Bull Spread
This strategy is applied when the spread gap
between the two contracts (Gold Far month
contract – Gold Near month contract or Lead Oct
contract – Zinc Oct contract) is more or widen.
Bear Spread
This strategy is applied when the spread gap
between the two contracts (Gold Far month
contract – Gold Near month contract or Lead Oct
contract – Zinc Oct contract) is less or narrow
(gap between the two contract become “Zero” or
“negative” figs.)
Calculation:
Here, I’m taking the example of spread between
the Lead & Zinc (my favourite one):
First take the historical data for last one month
from MCX website (mcxindia.com – Market Data
– Bhav Copy – Bhav Copy Commoditywise)
Then take the spread gap between the closing
price of each day (Spread Gap = Lead Closing
Price – Zinc Closing Price) for last one month
Take the "Average" of those spread gap of the
closing prices and also the "standard Deviation"
of those spread gap of the closing prices for last
20-25 days.
Now we will have two figs. That is “Average” &
“Standard Deviation” .
Now comes the final part that is the decision
making and implementation of Spread strategy:
Bull Spread Range = Average + Standard Deviation
If the spread Gap > Bull Spread Range, then we
will go for Bull spread strategy. It means we will
Sell the far month contract or Lead contract and
Buy the near month contract or Zinc contract.
Bear Spread Range = Average - Standard
Deviation
If the spread Gap < Bear Spread Range, then we
will go for Bear spread strategy. It means we will
Buy the far month contract or Lead contract and
Sell the near month contract or Zinc contract.
Important point:
I have attached an Excel file: Spread Analysis –
Lead & Zinc for your reference to understand the
calculations.
For calculating the spread gap between the two
contracts, I always subtract from Far month to
near month contract for spread calculation. If you
will change this calculation scenario then your
strategy will also change.
For lead & zinc spread, I found that there Bull &
Bear spread gap is around Rs. 2.5 to 0 even to
-0.5. Any time if you find a spread gap of Rs. 4 to
5 or Rs. -2 to -3 will be a very good opportunity
for spread in Lead & Zinc.
For Gold, Bull & Bear spread gap is around Rs.
140 to 80/70.
Same way you can find the spread gap for other
commodities also. Continues study and watch will
help you to understand the spread gaps for
different commodities.
If anyone can have it live for intraday then it will
be a very good opportunity .
where is ur excel file ?
 

ashu1234

Well-Known Member
#4
The spread strategy that you posted is copied from traderji itself and its 3-4 year old. Lead and Zinc have seen a huge spread difference which is due to fundamental factors. Years back they used to be same, lead and zinc priced same, but due to supply constraints one is trading higher than other. So dont post such foolish and outdated strategy....keep following fundamentals for better trades.
 
#5
it is true that this method had been posted long time back by some other author.From that point of time there has been a major change in the market. I have coded this method on metastock and found that most part of the article still holds good. But the entry and exit points mentioned by the author does not hold good in today's scenario. So what i have done is, i have changed the entry and exit rules a bit. This method not only holds good EOD data, but works extremely good for intraday as well.
So my method are as follows-
1. Goto Metastock Downloader and create a composite, using lead mini as primary and zinc mini as secondary.
2. Now open metastock and open the composite index created in step 1.
3. Now on the data plot a simple moving average (I have tried EMA, but it dosent work).
3. Now put the SD on the chart, as mentioned by the author (if anyone wants i can share the code for it, you might not be able to lay moving average and SD on the same chart. So i wrote a small indicator for it :) )
4. Now we will enter the trade once the spread moves below the lower SD channel (same rule holds if the spread moves above the upper SD)
5. We will close the trade once the spread begins to move back into the channel and touches the moving average line.
6. All the entry and exit would be done at "current market price" of the underlying security.
Please let me know if you would like to see the spread chart which i have coded. I have also noticed that the rule holds good for the following pairs as well-
1. Lead & Zinc
2. Copper & Nickel
3. crude & natural gas
Currently i am looking at other pairs also. I will update in the forum if people are interested.
 
#7
in this case go long on Apr and short on Feb. Let me know if you want me to share the logic of doing so. Also, you might be interested in looking at crude and natural gas. The spread at this point is pretty attractive.
 

cloudTrader

Well-Known Member
#8
it is true that this method had been posted long time back by some other author.From that point of time there has been a major change in the market. I have coded this method on metastock and found that most part of the article still holds good. But the entry and exit points mentioned by the author does not hold good in today's scenario. So what i have done is, i have changed the entry and exit rules a bit. This method not only holds good EOD data, but works extremely good for intraday as well.
So my method are as follows-
1. Goto Metastock Downloader and create a composite, using lead mini as primary and zinc mini as secondary.
2. Now open metastock and open the composite index created in step 1.
3. Now on the data plot a simple moving average (I have tried EMA, but it dosent work).
3. Now put the SD on the chart, as mentioned by the author (if anyone wants i can share the code for it, you might not be able to lay moving average and SD on the same chart. So i wrote a small indicator for it :) )
4. Now we will enter the trade once the spread moves below the lower SD channel (same rule holds if the spread moves above the upper SD)
5. We will close the trade once the spread begins to move back into the channel and touches the moving average line.
6. All the entry and exit would be done at "current market price" of the underlying security.
Please let me know if you would like to see the spread chart which i have coded. I have also noticed that the rule holds good for the following pairs as well-
1. Lead & Zinc
2. Copper & Nickel
3. crude & natural gas
Currently i am looking at other pairs also. I will update in the forum if people are interested.
@ sus19in,

Thanks for posting your trading rules.

Have you been inspired by the pair trading strategy offered by Mark Conway . Your strategy is similar in some aspects but you have not taken Co-efficient of correlation in your strategy .

In intraday with Lead - Zinc pair trade what is your win/loss ratio . Do you find the strategy as consistent ? Do you tend to carry forward the trade if the result is not visible in the intraday trade ?

If its possible for you , can you plz. share the metastock code for the strategy and also if you could post an image of the chart as you have mentioned in the above post .

Thanks.
 

cloudTrader

Well-Known Member
#10
h00ps://www.dropbox.com/s/kzscfo58szmupj2/Spread%20Analysis%20-%20Lead%20and%20Zinc.zip?dl=0
At c.trader , this data is quite old. Do you have the latest performance sheet ?
Correlation has changed between Lead & Zinc off late . Earlier it used to be much more than it is now.

Thanks.