Spread distance is one of the best performing indicators in the trading world.
It allows to detect the divergence between two strongly correlated markets. It is applicable to different types of pairs, such as NASDAQ against S & P500, gold against silver or Dow Jones against NASDAQ.
This indicator is constituted by a line which oscillates in gray which represents the distance between the two markets, the yellow line is the average of the distances during a given period and upper and lower bands.
It can be used alone in a trading strategy or with other confirmation indicators including VWAP, ATR and RSI.
For a successful strategy that uses the spread distance indicator, please see Statistical Arbitrage Strategy.
The Spread distance indicator can be used as part of a calender spread. The latter is based on an intramarket spread. In fact, we take the same market, but with two different contracts deadlines, as in the case of NQ 12-21 with NQ 06-21.
As you can see, the indicator can be used in manual mode and in automatic mode. However, especially for this intramarket trading method, we advise you to carry out an automatic strategy, in order to control the speed of change of the index.
If you have an idea of a manual strategy based on this indicator or another, do not hesitate to write to us in the section reserved for Custom programming.
Very important note, visually it is clear that the time series formed by Spread Distance is a stationary series. We can verify this phenomenon by one of the stationarity tests like ADF test, and this time it will be done in Pyton. If you are interested in a training which touches this phenomenon or another, please consult our programs listed in Online courses.
Long Spread :
We enter long spread if the oscillator cross above lower band. So, we buy in this case we buy the under performing market (First one) and we sell the outperform market (Second one).
Short Spread :
We enter short spread if the oscillator cross below the upper band. So, we buy in this case the under performing market (Second one) and we sell the outperform market (First one).
Depending on your trading philosophy, the exit point could be fixed with a pre-defined Take profit and Stop loss, using another indicator or if the Distance Spread oscillator CrossOver the yellow line.