5 Things We've Learned about Spread Trading

Monday, August 22, 2011 at 2:12PM
Michael Bigger

• Avoid Spreads Which Have Recently Gapped – Sometimes a spread will meet your criteria because it gapped.  Be careful of these.  It may indicate the spread relationship is broken.

• Your Target Profit and Stop Loss Should Be Symmetric – If you are right more often than not you will make money.

• Time Limit – Set a time limit for how long you hold a spread, ideally not too far away from the half-life.  There is a risk and opportunity cost to holding positions too long.

• Know How You Made or Lost Money – Are you making more from your shorts or longs?  Is there a catalyst involved or are the spreads just drifting back to the mean?

• Track the Spreads after You’ve Unwound Them – Are you unwinding too early or too late?

Written by Norm Winer. Follow me on Twitter and StockTwits.

 

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