1

FOREX SPREADSFOREX 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 = 1.5658

USD / Swiss Franc = 1.2896

Take out the two Swiss Franc and

Keep the €uro/USD

1.5658 / 1.2896 = €uro/USD 1.2142

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

(Swiss x 125.000 minus AUD x 100.000)

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 19th.

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 $. 24.000.- 5-day average bar length of the spread is $. 800STOP: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 125.000 SFR x 0.7870 = US$ 98.375

Australian $ contract is 125.000 AU$ x 0.7405 = US$ 74.050

In order to start with a neutral spread US$ position you

need:

3 x CME Swiss Franc contracts 3 x 98.375 = US$ 295.125

4 x CME Austr. Dollar contracts 4 x 74.050 = US$ 296.200

( so, 7 times CME margin ! )

17

3 x CME Swiss Franc contracts margin 3 x 3.200 = $ 9.600

4 x CME Austr. Dollar contracts margin 4 x 1.700 = $ 6.800

So, around $ 17.000 controls around $ 600.000 in CME

Forex contracts

In the Forex Spot market, margin requirements to control the

same $ 600.000 are :

1: 50 $ 12.000

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 0.7883 - NZD 0.7004 (0.7883/0.7004)

You need NZD 112.550 short for AUD 100k. long

22

Extra signal confirmation: Momentum between AUD

(top chart) and NZD confirms the spread signal

23

Example: €uro/SFR 1.5658 and US$/SFR 1.2896Take out the two SFR and keep €uro/US$ as a signal indicatorCross Rate: SFR 1.5658 / $ 1.2896 = €uro/$ = 1.2142

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 1.5658 / $ 1.2896 = €uro/$ = 1.2142In order to start neutral we use in this example:100k €uro/SFR against €uro/US$ 121420

26Spread: 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

2830 Y T-Bond against 10 Y T-Note Future

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

30

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

31