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Methods of Spread Day Trading

Support and Resistance Levels. The most specific and basic method of day-trading spreads is to determine support and resistance levels at the end of the trading day and to use these levels as entry and exit points the next day. The chart shown in Figure 17-1 illustrates some simple support and resistance buy-and-sell points (i.e., by buy and sell I mean entry and exit points for the spread) using traditional support and resistance lines. This is, as you can easily see, a very simple and effective method for day-trading spreads.

Just remember that if you are day trading a spread then you must be in and out of the spread the same day. Do not carry the spread overnight, since this would, as you know, negate the entire purpose of day trading. Since the spreads you will be day trading are selected for their volatility, I urge you to avoid carrying them overnight in order to circumvent any nasty surprises the next day.

Thirty-Minute Timing with Stochastics. Now consider the same chart as shown in Figure 17-1 but with the addition of a 9-period slow stochastic indicator using SP and traditional stochastic timing signals as described in Chapter 5. Examine Figures 17-2 and 17-3. Please carefully study my notations. As you can see, stochastic timing methods for spread entry and exit have considerable potential provided there is sufВэficient movement in the spread to allow for intraday trading.

Spread Timing with RSI. Yet another method of timing intraday spread entry and exit is by using either a 14- or a 9-period RSI. Several methods of application are illustrated in Figures 17-4 through 17-7. Here is a synopsis of the methods:

Вц RSI crossovers from below 50 and above 50. This is a simple method. When RSI is 50 or over you will want to be bull spread (i.e., long front month and short back month). When RSI crosses from above 50 to below 50, you will want to be bear spread. If the crossover occurs durВэing the day with sufficient time left for a trade, then you can initiate a position and/or reverse a previous position. Be out by the end of the day. The next day you can establish a new position in the spread conВэsistent with the RSI reading and be out by the end of the day or reverse on a reversing signal. At times there will be several oscillations above and below the 50 percent RSI line. If this occurs too frequently, then use a longer RSI period (i.e., 18 or 24 as opposed to 9 or 14).

Вц RSI crossovers from below 25 and above 75. This is also a very simple method. When RSI is 75 or over you will be bull spread (i.e., long front month and short back month) from a previous buy entry. When RSI crosses from above 75 to below 75, you will want to be bear spread. If the crossover occurs during the day with sufficient time left for a trade, then you can initiate a position and/or reverse a previous position. Be out by the end of the day. The next day you can establish a new position in the spread consistent with the RSI reading and be out by the end of the day or reverse on a reversing signal. At times there will be several oscillations above and below the 50 percent RSI line. If this occurs too frequently, then use a longer RSI period (i.e., 18 or 24 as opposed to 9 or 14). If RSI is 25 or lower you will already be bear spread from a previous sell signal. If RSI then goes above 25, you will reverse positions and exit at the end of the day or on a reversing signal. At the beginning of the next day enter the spread again consisВэtent with the RSI reading.

Вц RSI first derivative crossovers. This method is very specific and does not differ from the previously discussed RSI first moving average (MA) derivative method already discussed. The rules of application are simple. If RSI is below its MA derivative, then you will be bear spread. If RSI is above its first MA derivative, you will be bull spread. Exit at the end of the day or reverse during the day if there is a crossover signal. You can reinstate position the next day on or near the open consistent with the last signal.

Over the years I have developed both a strong liking as well as a strong respect for spreads and those who trade them well. Spreads can offer more conservative opportunities and higher probability of success. But to benefit from intraday spread trading, you will need to choose volatile spreads. Many of these are cross currency spreads, but there are times during which grain and livestock markets, cotton, interest rate, and inter-precious-metals spreads can be traded very effectively. You will need to remain aware of which spreads are sufficiently volatile and liqВэuid for day trading. Finally, it is always best to use price orders for spreads, since market orders can prove very costly both on entry as well as on exit. As long as you remain aware of the risks, volatility, and liqВэuidity of the spreads you are trading, then you can do very well trading spreads on an intraday basis.