1 FOREX SPREADS Spreads between Forex Pairs MTA 2004 Ron Schelling

2 SPREAD: Simultaneously Long/Short INTERMARKET SPREAD: Long at one exchange/short another exchange, same contract CALENDER SPREAD: Long in one month/short another month, same contract HEDGE: Long/Short contract against physical commodity/portfolio

3 WHY SPREADS ? -Lower margin -Trend more often -Less risk -Can keep overnight positions -Not always expensive real-time data necessary -Less stop-out risk compared to stops on single contracts

4 Spreads between stocks, commodities etc. is the difference or ratio between the two. Why not spreads between foreign exchange rates ? Exchange rates are already Pairs between two foreign currencies Pairs between foreign currencies are cross-rates No roll-over on Forex spot compared to futures

5 Correlation between CME Forex contracts >0.8 is high correlation Example CAD against AUD is 0.927

6 High correlation between Australian Dollar and Canadian Dollar

7 Cross-Rate €uro / Swiss Franc = USD / Swiss Franc = Take out the two Swiss Franc and Keep the €uro/USD / = €uro/USD

8 Top chart: US Dollar per Swiss Franc Middle chart: US Dollar per Australian Dollar Bottom chart: Correlation

9 Bottom chart: Difference in contract value between both CME contracts (Swissx minus AUD x )

10 Bottom chart: Spread value, now with Open/High/Low/Close bars

11 The bars are the OHLC of the spread between the two contracts In this case, weekly bars (box) around daily bars Trend in the spread is up when the 1e daily close is above the last weekly high (box) v.v. Example December 19 th.

12 Two time frames, Boxes (weekly) and MACD (daily) working together !! Boxes are the trigger

13 Risk management: Bars at the bottom charts are the average 5-day bar length of the spread-bars within the boxes

14 Risk management example: - Spread value between two contracts is $ day average bar length of the spread is $. 800 STOP: When next spread value close is $. 800 against you

15 Profit protection: At the average bar length $ 800 -both, Spread + MACD in the same direction, take out 50% -one indicator Trending, take out 75% of the spread

16 Difference in trading CME futures or Forex Spot ? CME Futures: Swiss Franc contract is SFR x = US$ Australian $ contract is AU$ x = US$ In order to start with a neutral spread US$ position you need: 3 x CME Swiss Franc contracts 3 x = US$ x CME Austr. Dollar contracts 4 x = US$ ( so, 7 times CME margin ! )

17 3 x CME Swiss Franc contracts margin 3 x = $ x CME Austr. Dollar contracts margin 4 x = $ So, around $ controls around $ in CME Forex contracts In the Forex Spot market, margin requirements to control the same $ are : 1: 50$ or 1: 200$ 3.000

18 Forex Spot compared to Forex futures: -You can trade almost any amount -Lower margins -24 hours market -No roll-over of future contracts -Equal amounts for $ neutral spreads -High liquidity -Execution speed -Commission free trading -Free quotes, no exchange fees

19 Spread CME €uro/USD (top chart) against Swiss/USD (middle) At \/ sold €/$ and bought SFR/$, both $ 12,50 per point.

20 At point 1 (close) long in the spread AUD/NZD, stop value $ 350 At point 2 stop reached at the close At point 3 short in the spread, (sold AUD, bought NZD)

21 On Feb. 13, long spread signal, start Neutral with: AUD NZD (0.7883/0.7004) You need NZD short for AUD 100k. long

22 Extra signal confirmation: Momentum between AUD (top chart) and NZD confirms the spread signal

23 Example: €uro/SFR and US$/SFR Take out the two SFR and keep €uro/US$ as a signal indicator Cross Rate: SFR / $ = €uro/$ =

24 €uro/US$ (top) is our signal (with Boxes) to trade the spread between €uro/SFR and US$/SFR. P/L is therefore in Swiss France converted to US$ (chart 5)

25 Cross Rate: SFR / $ = €uro/$ = In order to start neutral we use in this example: 100k €uro/SFR against €uro/US$

26 Spread: 2 x E-NQ against 1 x E-S&P ! Use same strategy

27 One more step you can add: On each new signal take a new full position, but take out each time the 75% of the position when the average bar length is reached

28 30 Y T-Bond against 10 Y T-Note Future

29 B-Pound against €URO, 1 hour bars and daily boxes

30 Top charts: German DAX converted to US dollar against 2 x E-Mini based on daily DAX close

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