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Pair Trading Strategy Journal
As some of you may know ive always been a long only, position trader, and have dabbled in short-term trading a few years back. with a bit of extra time on my hands these days i'm gonna branch out again. ive decided to focus on pair trading, i use to know a couple of guys at a firm that were raking in the $$$ trading pairs all day, and this style seems to be more logical and safer than other styles of trading.
i'm going to use this journal as a framework for discipline & consistency in my pair trading. ive done a trading plan and with the help of a program for signals and my own analysis i'm going to post my trades here.
sounds interesting. looking forward to ur posts
I trade a portfolio of pairs as well as some long positions to balance out my capital and stay as neutral as possible. Look forward to seeing your methods. best of luck.
thanks for that guys, il try my best.
ok first trade today; i put my trades on in the last hour of the trading day, i find there's good liquidity at that time, prices are not as volatile as the morning and therefore it's easier to get a good fill, also i find prices settle around closing time and if there's still an valid signal at that time its generally more meaningful. I only trade pairs with correlation above 80% and look to exit the trade within several days.
Today;
Short: AEM @ 51.62
Long: GG @ 30.31
I like taking trades where a signal has been produced and the pair has diverged even more, plus the ratio chart looks way overbought as confirmed by a RSI of 98.14. Ive attached a screenshot.
So I guess no one told you there's no significance between a stock priced at $100 divided by a stock priced at $1. It's a waste to just look at the ratio.
The twenty or so steps beyond that chart are what makes the big money, and distinguishes between an amateur and the quant.
Quote from bwolinsky:
So I guess no one told you there's no significance between a stock priced at $100 divided by a stock priced at $1. It's a waste to just look at the ratio.
The twenty or so steps beyond that chart are what makes the big money, and distinguishes between an amateur and the quant.
Quote from jonnysharp:
I know its not wise to trade shares that have a significant difference in share prices, so i would never trade a $100 share against a $1 share, also i'm not just looking at the ratio chart when i take trades.
everyones got to start somewhere, i'm trying to start small and build myself up to be a good pair trader, if your a successful quant pair trader please fill us all in on the 20 or so steps you talk of.
i try to put on one trade per day, that way i'm consistent. also il try to hold a portfolio of pairs from different industries and never have more than one position in any stock.
today's trade:
Long AMT @ 39.98
Short CCI @ 37.25
Open trades: 2
www.pairtrader.com, Bright affiliated
Quote from faust:
www.pairtrader.com, Bright affiliated
2 Trades taken today:
Long HAL @ 45.07
Short CNQ @ 83.13
Long HD @ 26.00
Short LOW @ 24.31
Open trades: 4
HD/LOW
Any intraday trades or mostly swing trading these pairs?
no intraday trades yet, looking to hold trades for 4-7 days average maybe a little longer whilst I wait for a exit signal.
Thanks for the response.
Good trading to you!
Quote from jonnysharp:
no intraday trades yet, looking to hold trades for 4-7 days average maybe a little longer whilst I wait for a exit signal.
One trade today:
Long M @ 19.41
Short TGT @ 51.06
Open trades: 5
As Ive said before I like to take trades when a signal has been generated and the two shares move away from each other even more on no significant news as is the case with my 2 trades today.
Long GOOG @ 491.00
Short AAPL @ 176.89
Long PBG @ 29.80
Short DPS @ 24.28
Open Trades: 7
I was wondering if anyone would start a journal on pairs...
I trade exclusively pairs. I got a good chuckle when I saw your first pair aem/gg.
I actually traded it the other way recently and made some nice coin. Also traded hd/low recently as well. However I was long low short hd.
You asked about certain variables to look for when entering a trade...I created a spreadsheet that tracks over 500 pairs based on the closing prices and have programmed the following conditional statements into the spreadsheet:
1. Pair ratio needs to hit 2 standard deviations away from its mean based on a 20 day moving average.
2. The long position needs to have a 14 day RSI greater than 40% and the short position needs to have a 14 day RSI less than 60%.
3. Correlation needs to be greater than 70% for the trailing 60 days.
In addition, by definition pair trading is a mean reversion strategy, but we all know pairs are either in diversion or reversion mode. Getting the long and short position is critical for success and I have my spreadsheet identify for me the trend.
Like you I will hold onto a pair sometimes for a day or even weeks. I also am willing to add upto five layers deep on any given pair. However I am usually out of the pair within three weeks or have taken profits on some of my layers to deleverage.
Its also important that you have a broker that pays you interest on the short side for borrowing stocks. A key component for successful hedging.
I don't have any fundamental analysis built into my model as of yet, meaning I am not comparing relative valuations to identify pairs, but this is important especially if you are adding layers like I am. I do the fundamental analysis manually after my spreadsheet has identified a pair that meets my criteria.
Good luck with your trading and keep your positions small. The big advantage to pairs is that you can drive volume to make profits spread out over many pairs. Diversification makes good business sense.
As the number of pairs grows, you will be able to consistently take profits just about every day. Again best of luck. Its not an easy game to play, but in time you will learn to love it especially when the markets are volitile.
Im am wondering how you (johnny) and Yobo set a STOP level when you put on a trade?
Yobo I understand that you add "layers" as the pair diverges even futher from its mean.
To avoid a potential blow up where is the ultimate "Uncle" point that tells you the trade has not worked?
Account blow ups only occur if your trade size is too big. Keep your trades small and give them time. Practice smart portfolio management and trade volume through many pairs.
If both sides of the pair go against you get out after you have determined that you are wrong because of a news event, fundamentals, technicals, etc. And reverse the trade/pair. If one side is working hold on and buy another layer. I don't use a set percentage figure.
My time frame per trade is also a determing factor of when to take losses. My criteria is all set around 23 day moving averages which is usually the maximum amount of time I will hold onto a trade.
The harder question to answer is when to take profits. I always try to scale out of positions since I am scaling into them. And because I use leverage it is even more important to take profits.
Always have a daily profit goal in mind and do whatever it takes to hit that.
Hope this helps.
yobo, thanks for your input, I appreciate that, its always interesting to hear from another pair trader how they make their coin. There are so many different ways to pair trade, everyone can really customize their own style. If I were to trade pairs by divergence instead of mean reversion I would focus a lot on the fundamentals so that I'm long the strong, cheap stock and short the weak, expensive stock and I would probably use the ratio chart to ride the trend, maybe something for me to look at later this year.
IWT2008, I don't use stops, Ive used heaps of different strategies, systems and methods over the years and have not found stops to help one bit, they are a market maker's dream and a trader's nightmare, like yobo says your a/c won't be wiped out if you keep your trade size small, that's the trick of successful trading, make heaps of small trades, for me I never have more than 20% max of my a/c exposed to any stock and I use leverage so that I can have up to 15 pairs open at any given time, that's the beauty of pair trading, I would never lever my a/c that much on directional trading, also I use pairtrade finder, a program for my entry and exit signals aswell as layer my own analysis on top of those signals, I won't take them all blindly, I like to see a few other conditions upon entry, but for exit I take the signal without hesitation. I think entry is very important because you have a choice whether to buy or sell, whereas when holding a position your more inclined to exit at an given opportunity because you need to rotate your capital from old trades into new trades with better risk/reward characteristics.
Cool. I checked out pairfind trader and it looks pretty cool. Haven't downloaded yet for a free trial, But I did sign up for their email alert service. Did you buy the software or are you just testing it out?
I am going to test each one of their pairs in their daily email against my pair screener to see if we are on the same page. The instructional video makes it look like you can test verious time periods?
I watch for dispersions as well as reversions. I first started out just looking for reversions but then it became pretty obvious that pairs also disperse. In fact more money can be made on the dispersion of pairs versus just reversion so why limit oneself to just one side of the pair trade. Hence the reason why I trade both directions of pairs.
Curious to hear more of your thoughts about the software.
Yes by looking at some charts of different pairs you can make alot of $$$ on divergence trading the pairs instead of reversion trading them, i'm definately going to have a closer look at this style, I think the holding periods would be longer though as you would want to stay with the trend.
Yeah I bought the program. The only thing I don't like about it is the portfolio management feature, its a bit lacking but I don't use it anyway. However the signals is why I bought it, Ive tried spreadsheets and all that but just found it too time consuming and messy, whereas the program automatically updates the data and gives me entry & exit signals during the day. yeah you can test those signals P&L in different time periods. works well for someone like me.
Hey Johnny Sharp,
Your trades are looking good as of today's close. Nice work. Keep it up.
Thanks for your support yobo.
One trade today, a nice divergence between the ratio chart & RSI chart drew my attention to this pair.
Long POT @ 177.04
Short CF @ 146.85
Open Trades: 8
Very interesting journal to me, thanks for doing it. Have you tried any software besides Pairtrade Finder, or was that the first you tried, and you're sticking to it? It seems there is some software out there for using Ninjatrader to evaluate pairs, but I'm just starting to work with Ninjatrader. Pairtrader seems to be at a good price if it works well.
Thanks Susannah.
No I haven't tried ninjatrader, i was recommended pairtrade finder to me from another pair trader. and yes so far so good, ive paper traded it and came up with good results just trying to do the same in real time now. ive tried analysing trades in excel a few years back and failed, so I looked at a few programs but settled on pairtradefinder because as you say it was pretty cheap and does the job, it comes with a guide that gave me some ideas and ive built on them and designed my own trading plan with additional analysis to the program's signals.
Quote from Susannah:
Very interesting journal to me, thanks for doing it. Have you tried any software besides Pairtrade Finder, or was that the first you tried, and you're sticking to it? It seems there is some software out there for using Ninjatrader to evaluate pairs, but I'm just starting to work with Ninjatrader. Pairtrader seems to be at a good price if it works well.
Quote from jonnysharp:
Thanks for your support yobo.
One trade today, a nice divergence between the ratio chart & RSI chart drew my attention to this pair.
Long POT @ 177.04
Short CF @ 146.85
Open Trades: 8
GGSAE, appreciate the tip, I did notice that my CF/POT pair has the highest volatility(1.54%) out of all my open trades, and I did reduce my normal size for this trade, my trade size is 15% of my a/c value on this trade, so a 50% overnight drop in a stock would equate to a 7.5% decline in my a/c equity, I can handle that, but your right the fertilzer stocks have very high expected volatility as they could be coming to an end of a dream run over the past few years.
CF will be added to the SP500 upon the completion of the HPQ/EDS transaction. This probably added to CF's outperformance yesterday and may be the same for the next day or so.
I also think you might find more success and better entry signals if instead of doing all of these 1:1, take the ratio to make the trade mroe even. In other words, BIDU is about 1.83 times AAPL so a spread can be, for example, 100 BIDU Long/Short 183 AAPL.
Chart that spread and you will see entry and exit patterns. That is how I have been doing spread trades with some success.
I am glad to see a journal dedicated to pairs. Pair trading is one of my profitable strategies and I always look forward to hearing about another traders take on things.
Good luck.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Thanks for your comments guys, good to see senior members chime in.
Closed first trade today:
Sold AMT @ 40.50
Covered CCI @ 36.39
Profitable on both legs.
Opened 2 new trades today:
Long GR @ 50.33
Short COL @ 51.81
Long MBT @ 64.23
Short TII @ 13.50
Open Trades: 9
I will post & update a spreadsheet at the end of each month showing closed trades.
Bogan7, I just Googled it and saw some stuff mentioning code for Ninjatrader for trading pairs, I haven't looked into much in depth yet. There should be a week coming up in September when I can dedicate time to coming up to speed in Ninjatrader, I'll let you know if I discover anything useful.
I joined you on a couple of trades...
goog/appl
pot/cf
mbt/tii
Nice one yobo, you would have got a better cost avg than I did on those trades.
One Trade today:
Long ROK @ 46.74
Short WY @ 53.28
Open Trades: 10
Just founds this thread. Very interesting!! I trade intraday pairs with The IPTS at www.daytradepairs.com The only downside is that you need Tradestation to run it.
Good luck Johnny,
I ran your last trade through my system and it did not register a buy. I also got an email alert from pairtrade finder for long F and short GM. My system again did not register a buy.
My parameters are pretty strict. I find it interesting however how my system will sometimes match pair trade finder and sometimes not.
For instance, their email alert said long F and short GM. My system did not generate the same signal. The reason being is that my system won't generate a trade unless the pair ratio is two std. dev. away from the mean and the long stock has to have an RSI of 40 or greater and short side needs an rsi of 60 or less. Ford has a 14 day RSI of 38 thus not qualifying and the ratio is also not outside the two std deviations but within it. So I wait.
Regarding your trade of ROK and WY, I see the the pair ratio is still within its normal trading range of less than 2 std deviations away from the mean. The RSI's are ok but neither are in over bought or oversold mode. Hence no buy signal for me.
Good luck. I'll be looking to take profits off the table tomorrow. Pair trading seems to be an effective strategy so far in this volitle market.
Thanks yobo, yeah I guess pairtrade finder signals have different variables in them compared to yours, also I can tweak the parameters for how the signals are generated, interesting how one of your conditions is for the long stock to have RSI > 40 and short stock to have RSI < 60, I haven't looked into doing that, although I remember a few years back seeing a trend following system that had similar filters, RSI must be overbought to buy, did ok i think, I only use the ratio RSI not as a strict filter however I do pay close attention to ratio/RSI divergences. good trading to you.
Quote from yobo:
I joined you on a couple of trades...
goog/appl
pot/cf
mbt/tii
No worries. How can you not be long POT...LOL
Quote from yobo:
No worries. How can you not be long POT...LOL
Not sure I understand your question but with all pairs I always capital balance. Equal amounts of dollars on both sides.
For me today, cf/pot is the one pair that is not working in my favor. Took some nice profits in MBT/tii, aapl/goog, and oxy/pxp.
I alos trade mos but have it paired against mon.
Quote from yobo:
Not sure I understand your question but with all pairs I always capital balance. Equal amounts of dollars on both sides.
For me today, cf/pot is the one pair that is not working in my favor. Took some nice profits in MBT/tii, aapl/goog, and oxy/pxp.
I alos trade mos but have it paired against mon.
ok point taken GGSAE, how do you access fundamental strength?
yeah most of the trades are working well today yobo.
One Trade today:
Long HON @ 50.36
Short LUK @ 46.45
Open Trades: 11
Quote from jonnysharp:
ok point taken GGSAE, how do you access fundamental strength?
yeah most of the trades are working well today yobo.
One Trade today:
Long HON @ 50.36
Short LUK @ 46.45
Open Trades: 11
I always trade with fundamental bias, unless the pairs are fundamentally neutral. When the fundamentals kick in, you don't want to be on the wrong side. Fundamentals give you another edge, especially when carrying pairs overnight or swing trading. CF is one of the more undervalued stocks in the sector based on P/E and P/B. To me fundamentals are much more important than technicals when trading pairs simply because we are trading a relationship between two stocks. The greater the fundamental edge and the more similar the company, the more inclined I am to beging building a position in the pair.
Another point I wanted to make regarding fundamentals...i've been told we're about to undergo one of the greatest consolidation periods of all time. Holding short positions in companies that look attractive as a buyout can be a painful 30-40% overnight price shock.
I agree, buyouts are oh so painful, not as bad as a merger blowout, but close. I was taught to also try to be long the smaller market cap company, another consideration when choosing a bias.
Talking about consolidation and overnight price shock...in addition to all the P's, PE, PB, PCF....wouldn't the size of market cap be as important, if not more important than anything else to consider?
Being short a small cap like CF against a larger cap like MOS or POT overnight could lead to disaster.
I believe mkt cap is a big factor when considering a L/S bias.
Yeah maybe my CF/POT trade isn't so good in terms of risk/reward, interesting stuff abt mkt cap for bias, it does make sense to be long the smaller stock, think i might incorprate that into my trading plan going forward on a discretionary basis.
I agree mkt cap is important, more important??, depends on the pair I think. A billion dollar mkt cap stock trading at 11 P/B and a 4 billion company trading at book value, who is more likely to get bought out?
No doubt fundamentals are important. In pair trading their is no easy hard fast rules. The key to success with pairs is the same with any trade. Timing, timing, timing. Whatever criteria you use, you want to be on the right side of the trade.
Personnaly, I have grown to really like pairs because I find it easier to manage the relationship between the too than it is to pick a direction a stock will go. Once a direction is clear, you can always cut bait and let the winner run while shedding the loser. or scalp profits throughout the day
Whatever works best for the trader. My time frames are short so the statistical relationship is more important than fundamentals.
I have been trading pairs for about 10 years. Mergers and surprise guidance are what will kill you. For guidance you need to look at the history and see if the companies have done it in the past. For mergers avoiding going long the the top 10%-20% of the industry can save you(not always) and you might get the benefit of a merger on your side. But you are doing cross industry so you still will have the problem. Also pairs 101, dont hold pairs into earnings unless with an option hedge.
Quote from Rehoboth:
I have been trading pairs for about 10 years. Mergers and surprise guidance are what will kill you. For guidance you need to look at the history and see if the companies have done it in the past. For mergers avoiding going long the the top 10%-20% of the industry can save you(not always) and you might get the benefit of a merger on your side. But you are doing cross industry so you still will have the problem. Also pairs 101, dont hold pairs into earnings unless with an option hedge.
Quote from yobo:
No doubt fundamentals are important. In pair trading their is no easy hard fast rules. The key to success with pairs is the same with any trade. Timing, timing, timing. Whatever criteria you use, you want to be on the right side of the trade.
Personnaly, I have grown to really like pairs because I find it easier to manage the relationship between the too than it is to pick a direction a stock will go. Once a direction is clear, you can always cut bait and let the winner run while shedding the loser. or scalp profits throughout the day
Whatever works best for the trader. My time frames are short so the statistical relationship is more important than fundamentals.
Ok some useful information there, definately incorprated into my trading plan. Do any of you guys pair trade small caps? what are they like to trade?
One Trade today, I'm short the large stock and long the smaller stock. Also IR has a lower PEG & PB relative to ITW.
Long IR @ 36.93
Short ITW @ 49.61
Open Trades: 12
Quote from jonnysharp:
Thanks for your support yobo.
One trade today, a nice divergence between the ratio chart & RSI chart drew my attention to this pair.
Long POT @ 177.04
Short CF @ 146.85
Open Trades: 8
__________________
Powerrrrrrrrrr
Thanks for the heads up powersignals, its funny you say wait for the correlation to be in an up-trend as I was just looking at that exact condition for an filter a few hours ago, looking back at the charts and signals generated they are definately more reliable when the correlation chart is an uptrend, something more to add to my trading plan.
Glad I started this journal already learnt heaps from more experienced pair traders, helps my position trading aswell knowing these things. From my CF/POT pair trade, which isn't looking to good atm ive learnt CF is being added to the SP500, it's undervalued relative to POT, is a smaller company relative to POT, and the pair has a falling correlation. I'm going wait for the pair to technically revert to the mean as usual before I get out, probably a loss but trade size is small relative to my a/c size, good leason I guess.
Some of you may have noticed I haven't taken any trades in the financial sector, I'm doing that on purpose as I think the risk of a fat-tail event is currently high, however when the turmoil subsides I think financial stocks will be fertile for trading because of the volatility. I think I will have to increase the number of pairs on my radar with these additional filters, might have to venture into the small cap space. Currently I have 278 non-financial pairs on my watchlists above 70% correlation, I might have to increase my universe to 500 pairs.
Interesting post about the correlation trend. And to further the discussion....
Quick question for anyone in the know...
Excel has a forcast calculation based on linear regression. To use this function I believe one would use the current mean pair ratio as the value you want to base off of to predict a future value, and then plug in the range of the correlations and the range of the pair ratios to get a predictive value?
Anyone else doing this or have experience with excel and statistics to confirm I am using the right data points and ranges etc.
Thanks.
Just a follow up to my previous post. Current pair ratio of cf/pot is .877, the mean is .74. and two standard deviations away from the mean is .85.
Also, as you noted, the correlation of the two has been trending down and the mean ratio has been trending up.
Applying linear regression the predicted pair ratio is .822 using the last 30 days of trading.
Interesting enough, the predicted value is 1 standard deviation back towards the mean indicating a mean reversion.
I'll make this point again, but everything is dependent upon the timing of your trade and the time frame of your trade. The window of opportunity to lock in profits could easily pass you by with this one as the longer term trend is clearly favoring cf long and pot short.
But one has to remember that pair trading by definition means taking profits quickly and when you have them.
Quote from yobo:
Just a follow up to my previous post. Current pair ratio of cf/pot is .877, the mean is .74. and two standard deviations away from the mean is .85.
Also, as you noted, the correlation of the two has been trending down and the mean ratio has been trending up.
Applying linear regression the predicted pair ratio is .822 using the last 30 days of trading.
Interesting enough, the predicted value is 1 standard deviation back towards the mean indicating a mean reversion.
I'll make this point again, but everything is dependent upon the timing of your trade and the time frame of your trade. The window of opportunity to lock in profits could easily pass you by with this one as the longer term trend is clearly favoring cf long and pot short.
But one has to remember that pair trading by definition means taking profits quickly and when you have them.
Quote from yobo:
But one has to remember that pair trading by definition means taking profits quickly and when you have them.
Quote from TraderD72:
... if the pair continues to diverge [from 2 stdev] I understand you add layers (new trades)
Quote from TraderD72:
I am wondering how this fits into an overall risk/reward profile?
If you enter a trade when the pair is 2 stdev's away from the mean (for example) is your profit exit goal at 0 stdev's? 1 stdev?
Now if the pair continues to diverge I understand you add layers (new trades) but without an ultimate hard stop loss point I am not sure where you could/would set your profit target.
yobo ive done some simple testing on the forecast function and I didn't find anything of predicitive value, however as GGSAE suggests a combination of different measurements might work.
Hey Emilo at what point of stdev would you take a loss if you've entered at 2stdev, do you take a loss if nothing has changed(no news released) it seems others here will scale into the pair if it deviates more.
Interested to hear how other pair traders trade management, do you guys have equal $ amounts on each side, or beta adjust, or any other risk controls.
"yobo ive done some simple testing on the forecast function and I didn't find anything of predicitive value, however as GGSAE suggests a combination of different measurements might work."
THe forcast function is exactly that a forcast function based on linear regression. if you plug in the right numbers it will forcast a value. I plugged it in to forcast a pair ratio given the trends of the pair ratio mean and correlation. Actually kind of interesting when you do it for a significant sample size of pairs. You do not get what you would expect all the time.
Anyway sitll holding strong on the cf/pot trade. I danced around with CF last Friday capturing some small profits on scalps but at the end of the day balancing out the pair with a doubling down.
Still expecting the spread to come back in a bit in the short run.
Quote from Emilio_Lizardo:
If the pair gets much beyond 2 stdev, take your loss and get out.
How is the correlation of the pairs being determined? I understand statistical correlation and how it is calculated, that is not my question, my question is more geared towards what variation (if there is any) of price is being used. Is it strictly price, variation of price from previous close to current close (last), or variation of price from open to close (last)? Or some other variation that i haven't thought of. As you can imagine any one of these could be "correct" but i am having a hard time finding what websites use for their correlation.
I use statistical correlation based on closing prices of the two stocks in the pair.
Interesting enough, the cf/pot pair is now profitable and underscores the importance of layers.
Quote from yobo:
I use statistical correlation based on closing prices of the two stocks in the pair.
Interesting enough, the cf/pot pair is now profitable and underscores the importance of layers.
My database identidies pairs when the ratio is out of whack...beyond two std. dev's. Plus I track RSI and a few other conditions.
Typically, when my system identifies a pair, I'll put it on my radar and watch throughout the day and enter at end of day. Since the pair is highly correlated meaning they should trade in tandem, I'll look for a day that is out of whack like last Friday. CF was quite strong and POT was quite weak. I netered a layer near the close. Today we see some mean reversion and POT outperforming CF. Trade becomes profitable. at the end of day I'll take those profits and maybe even consider flipping it given the underperformance of cf versus pot today.
Make sense? Another pair that showed up on the radar was long ir and short itw based on Friday closing prices. Today IR is down and itw is up. At the end of day, I'll go long ir and short itw.
Here's another example. Long MOS short MON. MOS is taking it on the chin today compared to MON. MOS is down 8% versus MON down 4.48%.
Pretty good odds that tomorrow the returns will reverse and MOS will outperform MON assuming MOS stays weaker than MON.
No real science involved other than buying weakness and shorting strength.
I've been following the thread and yobo, I agree, your MOS/MON trade looks good, I wish I had entered it at the close. If it doesn't gap up then I think I will enter.
Was talking with some other experienced pair traders today, they expect the next several years will be great for pair trading, range-bound markets, high volatility & hedge fund closures, good for us I guess.
Closed 2nd trade today for a profit:
Sold GOOG @ 465.25
Covered AAPL @ 166.19
Opened 2 new trades:
Long GENZ @ 77.84
Short BAX @ 69.79
Long APA @ 106.34
Short ECA @ 71.26
Open Trades: 13
Quote from yobo:
Here's another example. Long MOS short MON. MOS is taking it on the chin today compared to MON. MOS is down 8% versus MON down 4.48%.
Pretty good odds that tomorrow the returns will reverse and MOS will outperform MON assuming MOS stays weaker than MON.
No real science involved other than buying weakness and shorting strength.
Joab, interesting to see your on the other side of our CF/POT trade, would be pretty cool if we could both profit being on opposite trades. when are you thinking of exiting? any stops or targets in place?
Hey Joab, I agree in buying strength and selling weakness. My point was geared to when you open the trade at the end of the day. Short the stronger performer and go long the weaker.
As was the case yesterday with cf/pot. CF was the weaker stock and pot acted stronger...
Just to clarify....
Good luck with the trade, I took profits yesterday.
Nice work so far Johnny on taking profits again.
Any observations about the pairs you are still holding? Overall have you made money or are some of the losses you carry wiping out the gains you've captured?
Quote from yobo:
Hey Joab, I agree in buying strength and selling weakness. My point was geared to when you open the trade at the end of the day. Short the stronger performer and go long the weaker.
As was the case yesterday with cf/pot. CF was the weaker stock and pot acted stronger...
Just to clarify....
Good luck with the trade, I took profits yesterday.
Quote from jonnysharp:
Joab, interesting to see your on the other side of our CF/POT trade, would be pretty cool if we could both profit being on opposite trades. when are you thinking of exiting? any stops or targets in place?
Watch out for the BA/LMT pairs trade. It'll get ya.
I took a look at the the BA lmt pair and in my short term time frames of evaluating pairs I see that it has a negative correlation which brings up an interesting topic of trading pairs with negative correlations.
For you all finance types out there that have studied modern portfolio management you understand the importance of diversifying asset classes that are negatively correlated, example bonds versus stocks.
Some pairs that I like to trade with either a short or long bias are the sector spyders or the spy's and Q's matched up against their respective ultra short proshares.
For example, the today the major indexes, S&P, Dow, and Naz are getting whacked down toward the bottom of their recent channel. At the end of the day, a trade for me would be to go long the SPY, QQQQ, and the DIA and then hedge 40% of the total dollar figure with the SDS, QID, and DXD.
Anyone else trade negatively correlated pairs?
Quote from yobo:
I took a look at the the BA lmt pair and in my short term time frames of evaluating pairs I see that it has a negative correlation which brings up an interesting topic of trading pairs with negative correlations.
For you all finance types out there that have studied modern portfolio management you understand the importance of diversifying asset classes that are negatively correlated, example bonds versus stocks.
Some pairs that I like to trade with either a short or long bias are the sector spyders or the spy's and Q's matched up against their respective ultra short proshares.
For example, the today the major indexes, S&P, Dow, and Naz are getting whacked down toward the bottom of their recent channel. At the end of the day, a trade for me would be to go long the SPY, QQQQ, and the DIA and then hedge 40% of the total dollar figure with the SDS, QID, and DXD.
Anyone else trade negatively correlated pairs?
Not sure I follow you but negatively correlated assets/stocks move in opposite directions versus moving together.
So for example The SPY is 98% negatively correlated with the ultrashort SDS. So therefor if you wanted to hedge a long position in the SPY's you would buy in this case 50% of the dollar value of the spy's...
or, $10,000 worth of spys and $5000 worth of the sds to be 100% hedged. If you wanted a long bias you might buy $10,000 worth of the SPY's and hedge with $3000 worth of the SDS.
Quote from yobo:
Not sure I follow you but negatively correlated assets/stocks move in opposite directions versus moving together.
So for example The SPY is 98% negatively correlated with the ultrashort SDS. So therefor if you wanted to hedge a long position in the SPY's you would buy in this case 50% of the dollar value of the spy's...
or, $10,000 worth of spys and $5000 worth of the sds to be 100% hedged. If you wanted a long bias you might buy $10,000 worth of the SPY's and hedge with $3000 worth of the SDS.
you would long both securities instead of going long one and shorting the other as would normally be done in a correlated pair.
In the example I gave with the SPY and the SDs you go long the SDS only because it is twice the inverse.
With stocks you would stil short one and go long the other, but you are expecting a mean dispersion versus mean reversion.
Yes Yobo trades are going great, open & booked profits are covering my open losses.
Got exit signals on 2 trades today, closed both at a profit.
Sold HD @ 29.33
Covered LOW @ 26.71
Sold M @ 21.89
Covered TGT @ 55.01
Wins: 4
Losses: 0
Opened 2 new trades today:
Long AKS @ 45.53
Short MT @ 69.98
Long EMR @ 46.76
Short ABB @ 24.70
Open trades: 13
Good trading to everyone.
Today is a perfect example why you want to trade pairs.
Good luck to everyone! Its bloody in the streets.
Quote from yobo:
Today is a perfect example why you want to trade pairs.
Good luck to everyone! Its bloody in the streets.
Got an exit signal today and closed another trade for a nice profit, 8pts in 2 days, not bad.
Sold APA @ 110.03
Covered ECA @ 67.13
Opened 1 trade today:
Long MUR @ 71.91
Short APA @ 110.03
Basically just flipped by APA position.
Wins: 5
Losses: 0
Open trades: 13
Nice work Johnny.
Is it just coincidental that your trades happen to be the exact closing price of each day you sell and enter a trade?
Thanks, no its because I use MOC orders a lot of the time to enter and exit trades, otherwise I put on trades in the last 15minutes of the trading session.
I thought you probably were. Interesting tactic. Never thought of using MOC's that way. I like the idea.
pair trading brings about the best win:loss ratio in trading. when i began pairtrading, I started off with about 40 wins to 0 loss...........and then finally got blown up. if u keep adding layers, how do u avoid such blowups? I mean besides using many small sizes. I still pairtrade but with a consciousness and fear.
I think the trick is too make many small trades, I would limit the layering to once or twice and never expose a significant portion of my a/c to one stock, that way when the black swan event happens I still have chips to trade another day.
Quote from jonnysharp:
I think the trick is too make many small trades, I would limit the layering to once or twice and never expose a significant portion of my a/c to one stock, that way when the black swan event happens I still have chips to trade another day.
Quote from forsalenyc:
pair trading brings about the best win:loss ratio in trading. when i began pairtrading, I started off with about 40 wins to 0 loss...........and then finally got blown up. if u keep adding layers, how do u avoid such blowups? I mean besides using many small sizes. I still pairtrade but with a consciousness and fear.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Quote from Midas:
Pre determine a stop loss point and when your spread price hits that point take the loss and move on. Pairs trading is a game where we look for a statistical edge and exploit it.
Say you flip a coin 1000 times and you make 1$ every time you flip heads, and you pay .50 every time you flip tails. In the long run you make money. This example would be a risk reward of 1 : 2. T
Now lets say you have probability on your side. Your trade set up might have a 80% probability of going your direction (or a least its history show that to be the case as we never know what the future may hold). In this case you may risk 1$ to make 1$ and still end up ahead in the long run. You will be wrong 2 times out of 10. If you do not take your loss at a reasonable level you will give back everything that you made on the other 8 trades.
If you have a good pair with a high probability of mean reversion and always honor your stop loss, you should come out ahead over time.
Quote from newguy05:
but it still doesnt protect against overnight risk. My biggest fear of pair trading is what happens when one leg gaps overnight due to blackswan / news. Sure your stop loss will be hit in the morning when market opens but you will already be down/blown up, especially considering most of the pairtrading are pretty leveraged to make decent profit as they are considered hedged/market neutral.
How do you protect against something like that? Only thing i can think of is to trade very stable company pairs like pepsi/coke etc..where the chance of such event is minimal.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
pair trading is probably the safest method to protect against a black swan event. Remember both stocks may go down, but the weaker stock should go down more. You may incrue losses but they will be less than if you didn't have a pair on.
With pairs I don't like to use stops. I usually won't close out a pair unless something fundamentally has changed to change the order of the pair.
Quote from newguy05:
but it still doesnt protect against overnight risk. My biggest fear of pair trading is what happens when one leg gaps overnight due to blackswan / news. Sure your stop loss will be hit in the morning when market opens but you will already be down/blown up, especially considering most of the pairtrading are pretty leveraged to make decent profit as they are considered hedged/market neutral.
How do you protect against something like that? Only thing i can think of is to trade very stable company pairs like pepsi/coke etc..where the chance of such event is minimal.
Quote from yobo:
pair trading is probably the safest method to protect against a black swan event. Remember both stocks may go down, but the weaker stock should go down more. You may incrue losses but they will be less than if you didn't have a pair on.
With pairs I don't like to use stops. I usually won't close out a pair unless something fundamentally has changed to change the order of the pair.
I closed my ugly POT/CF trade today for a profit! Still I will be adhering to my new rules with trades like that.
Sold POT @ 162.05
Covered CF @ 131.20
Couldn't find any new trades today that fit my criteria, I will work on expanding my universe this weekend.
Open trades: 12
Wins: 6
Losses: 0
Have a good weekend everyone.
Quote from forsalenyc:
the way I see it.....it's foolish not to add another layer when the pair goes out of the money. but this is why people get blown up. so add layers not every 1 stddev but 2 or 3...... and do just 1 or 2 layers......this greatly increases ur w/l ratio.
without adding layers, your chances of winning isn't very good. best thing about pairtrading is its high probability of winning. and to exclude the option to add layers, or to NEVER do layers is not the solution. How often do you guys get in the money right away anyways.........
Only protection against the overnite news/takeover is try not to short the smaller companies. let smaller stocks be the long leg and bigcaps the short let. should research which stocks are good takeover candidates and avoid using pairs on these stocks.
Quote from forsalenyc:
the way I see it.....it's foolish not to add another layer when the pair goes out of the money. but this is why people get blown up. so add layers not every 1 stddev but 2 or 3...... and do just 1 or 2 layers......this greatly increases ur w/l ratio.
without adding layers, your chances of winning isn't very good. best thing about pairtrading is its high probability of winning. and to exclude the option to add layers, or to NEVER do layers is not the solution. How often do you guys get in the money right away anyways.........
Only protection against the overnite news/takeover is try not to short the smaller companies. let smaller stocks be the long leg and bigcaps the short let. should research which stocks are good takeover candidates and avoid using pairs on these stocks.
Quote from jonnysharp:
I closed my ugly POT/CF trade today for a profit! Still I will be adhering to my new rules with trades like that.
Sold POT @ 162.05
Covered CF @ 131.20
Couldn't find any new trades today that fit my criteria, I will work on expanding my universe this weekend.
Open trades: 12
Wins: 6
Losses: 0
Have a good weekend everyone.
Quote from javs5150:
By "adding layers" I assume you mean you average down on the position? If so then I assume you do this because your entries are usually not that great?
Quote from GGSAE:
I had a huge PNL turnaround today as i was fighting my CF pair and actually went extra long 40% CF yesterday near the lows when the stock was so battered. That's what I like about pairs is that there are many different techniques and skills you develop to increase profitability.
Quote from GGSAE:
Trading pairs it's actually very easy to calculate the potential loss exposure for X amount of layers...you really have to understand their ranges, everything from the 5 day to the 2 yr and how the trend.
I'm actually in the process of increasing my position sizes this w/e. I know how much heat I can expect to take from each position for X amount of move and what that represents of my account. I allocate a maximum of 3-4 layers but as i mentioned before these are never layered arithmetically, i vary the size all the time which is a big factor in my consistency.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Great journal and wonderful results so far.
Quote from GGSAE:
I had a huge PNL turnaround today as i was fighting my CF pair and actually went extra long 40% CF yesterday near the lows when the stock was so battered. That's what I like about pairs is that there are many different techniques and skills you develop to increase profitability.
I have to dis agree with this layer or scaling in concept you folks are sharing.
Personally (after 25 years in the biz) I have found that the only way you ever want to scale into any position is when your ADDING to an existing winner.
NEVER NEVER NEVER add to a loser.
This is fools game and will ultimately end in your demise as a trader.
Quote from Joab:
I have to dis agree with this layer or scaling in concept you folks are sharing.
Personally (after 25 years in the biz) I have found that the only way you ever want to scale into any position is when your ADDING to an existing winner.
NEVER NEVER NEVER add to a loser.
This is fools game and will ultimately end in your demise as a trader.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
I must be missing something, most if not all of these spreads appear to be losers. What am I missing?
Quote from Joab:
I have to dis agree with this layer or scaling in concept you folks are sharing.
Personally (after 25 years in the biz) I have found that the only way you ever want to scale into any position is when your ADDING to an existing winner.
NEVER NEVER NEVER add to a loser.
This is fools game and will ultimately end in your demise as a trader.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Jonnysharp,
You state that out of your first 4 completed pairs, you had 4 winners. Correct me if I am missing something. I think you had 2 winners and 2 losers with a big net loss.
Short CCI 37.25 cover 36.39
Long AMT 39.98 cover 40.50
net +1.38
Short AAPL 176.89 cover 166.19
Long GOOG 491.00 cover 465.25
net -15.05
Short LOW 24.31 cover 26.71
Long HD 26.00 cover 29.33
net + .93
Short TGT 51.06 cover 55.01
Long M 19.41 cover 21.89
net -1.47
total loss -14.21 per share
Why are people saying good job when it appears best to fade your signals????
Quote from Joab:
I have to dis agree with this layer or scaling in concept you folks are sharing.
Personally (after 25 years in the biz) I have found that the only way you ever want to scale into any position is when your ADDING to an existing winner.
NEVER NEVER NEVER add to a loser.
This is fools game and will ultimately end in your demise as a trader.
Quote from dazzy:
Jonnysharp,
You state that out of your first 4 completed pairs, you had 4 winners. Correct me if I am missing something. I think you had 2 winners and 2 losers with a big net loss.
Short CCI 37.25 cover 36.39
Long AMT 39.98 cover 40.50
net +1.38
Short AAPL 176.89 cover 166.19
Long GOOG 491.00 cover 465.25
net -15.05
Short LOW 24.31 cover 26.71
Long HD 26.00 cover 29.33
net + .93
Short TGT 51.06 cover 55.01
Long M 19.41 cover 21.89
net -1.47
total loss -14.21 per share
Why are people saying good job when it appears best to fade your signals????
Sorry
Like Emily Litella used to say.... Nevermind
I see that if all the trades are dollar neutral it worked out fine.
Good Point Midas...what Joab is failing to look at when layering with pairs you're actually using the scaling to get the spread price you want for a better entry...this is not the same as directional trading by adding to a position that goes against you..that is clearly adding to a losing position because in pairs the immediate goal is not necessarily to have the spread immediately move in your bias. There is a TON of artform in trading pairs, one style will work for someone that would be disastrous for another...
Quote from GGSAE:
Well my account is up about 1100% net YTD, with ever-increasing consistency and higher days/weeks/months...so forgive me if i ignore this advice from the guy who's claimed to have more than 5 blowups.
Quote from Joab:
Congratulations, do this for the next 25 years (as I have) then let's have an adult conversation.
Quote from GGSAE:
I'd rather have a chat with a professional trader of 10 years that's had zero blowups...or maybe the trader that hasn't had a losing month since 2001...I think their insight would be more insightful than your thread comparing USA to a 16 yr old girl.
Quote from Joab:
roflmao
You've been trading since 2001 and never had a losing month with 1500% returns per year ????
I have traded along side of some of the legends in this business and NO ONE can even come close to this.
If this where true you would be a mutli - billionaire by now.
Sorry buddy but your a liar and have zero credibility anymore.
Thanks Pachoo,
yes dazzy, I do capital balance each position thanks mschey.
forsalenyc, I will most likely post results of closed trades in a spreadsheet at the end of each month.
I did a backtest in pairtrade finder on small caps, mostly energy stocks, and they produce high profits. I was thinking of incorprating small caps in my universe, has anyone had any experience pair trading small caps?
Quote from Joab:
roflmao
You've been trading since 2001 and never had a losing month with 1500% returns per year ????
I have traded along side of some of the legends in this business and NO ONE can even come close to this.
If this where true you would be a mutli - billionaire by now.
Sorry buddy but your a liar and have zero credibility anymore.
Quote from GGSAE:
Are you fucking retarded, go back and re-read what i typed...I said I would rather speak to a trader that hasn't had a losing month since 2001, anyone with an IQ over 80 should be able to realize I wasn't referring to myself...when i said their insight I was referring to two traders in my office that i would speak too instead of you Mr Blowup...jezz have another.
And Don Bright knows who I am, so i can't lie about my returns dipshit - my credibility is all there.
P.S. Go learn some grammar in between drinks...'your a liar'...
Ok guys can we get back to business? This has the potential to be a good thread.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
guys have some respect, stop turning someone else's journal into a pissing contest between the two of you.
I am reading this thread about pair trading, noone gives a shit about your egos.
Quote from Joab:
Well since you made it personal ...
GO FUCK YOURSELF, DIP SHIT
You trade with Bright ?
That explains everything lol
It still amazes me that Don allows complete MORONS like you to work there.
Are you the fuck up that lost them millions last month.?
Actually the fact that you are probably just a newbie rookie that doesn't have a clue explains everything.
Quote from GGSAE:
One brilliant comment after another...are deflective comments and random insults what you retort with in your personal and professional life after making false statements?
Well since you made it personal ...
GO FUCK YOURSELF, DIP SHIT
Ummm no, you intiated the personal attacks when you misinterpreted what I typed...what did you say? 'your a liar and your credibility is zero'...
It still amazes me that Don allows complete MORONS like you to work there...
Actually the fact that you are probably just a newbie rookie that doesn't have a clue explains everything.
I trade out of Rob Friesen's office and upon telling Rob that I would be joining his office he said and I quote "that's awesome to have someone of your talent join the office'.
A couple months back Rob had also forwarded my email along with 6 other talented bright traders to a man interested in joining Bright...I was more than happy to answer his questions truthfully and honestly along with about 30 other 'strangers' that have sent me PMS over elitetrader.
Are you the fuck up that lost them millions last month.? There are so many things wrong with this statement I honestly don't know why you typed it...yeah i'm the harvard prof that blew out his account and yet i'm up over 1000% on the year...
In summary Joab, why are you even posting in this thread...? Each comment has been negative, you haven't offered any insight into trading pairs...all you did was criticize the layering approach failing to offer constructive criticism about how you (in detail) profit by trading pairs.
Ok let's get back to business. Here's a thought about correlation. Would like to hear others that have a statistical background.
By definition correlation is a statistical measure of how two securities move in relation to each other and is based on a linear relationship.
The higher the correlation the more likely a 1% move is matched by a 1% move in the other stock within the pair. Correlation is therefore a measure to consider to eliminate risk...
However correlation does not measure the probability of the pair reverting back to the mean. So how does one measure the probability of a pair reverting back the mean?
I also think one could make an argument that correlation does not eliminate volitilty and perhaps a better measure for screening pairs to maintain a market neutral position would be to consider the BETA spread between the pair.
So if we are all chasing alpha returns, why are we even considering correlation in our screening process for pairs?
correlation
Yobo,
I also agree that correlation may not be the best way to put together pairs. 2 stocks may have great correlation, but may have a large difference in their prices. So to put that pair on would require a large ratio to get the pair $ neutral. We've all been burned by large ratio spreads. I think a better measure of correlation is the absolute range of Stock A minus Stock B. If the range of a pairs spread is small, it means the 2 stocks never move far from each other. Still I've found that even this doesn't insure mean reversion. It's amazing how 2 stocks can track each other for a long time and then totally go their separate ways. I'm still searching
for a consistent approach.
Interesting topic about correlation, I will try to offer something later regarding that.
Closed 2 trades today at a profit;
Sold PBG @ 31.46
Covered DPS @ 25.55
Sold EMR @ 44.63
Covered ABB @ 22.22
Opened 2 new trades today;
Long MOS @ 87.39
Short POT @ 153.33
Long FCX @ 72.06
Short BHP @ 59.63
Open trades: 12
Wins: 8
Losses: 0
http://www.epchan.com/downloads/cointegration.pdf
http://epchan.blogspot.com/2007/01/...s-strategy.html
http://www.yats.com/doc/cointegration-en.pdf
Yobo,
I look for correlation of a pair as signal to look at the pair a little closer. I use a chart to determine how often the pair reverts to the mean. I subscribe to a database that does the statistical data crunching so I can spend my time trading. From the database I look at the average daily range, correlation, and another ratio developed by one of the database creators that determines how often a pair wiggles back and forth over short and long time frames.
When I see pairs that look promising I pull up a chart on them keeping the ones that seldom trend, while discarding the others. This group becomes my stable of pairs which I constantly look to add new pairs. My favorite charts are red and green daily and weekly bars in a back and forth range right accross my screen. This is not as precise as some real "quant" types might come up with but it works for me.
Bell Weather,
Good stuff. Thanks for sharing the links.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
i think trading pairs is one of the best where trading with stock is ok ...but much better using E.T.Fs ....indexes.... and using options or futures
ex: SPUD spread
trading pairs it is much safer to average down ...unless you have a crystal ball
Quote from Midas:
Yobo,
I look for correlation of a pair as signal to look at the pair a little closer. I use a chart to determine how often the pair reverts to the mean. I subscribe to a database that does the statistical data crunching so I can spend my time trading. From the database I look at the average daily range, correlation, and another ratio developed by one of the database creators that determines how often a pair wiggles back and forth over short and long time frames.
Bell Weather,
Good stuff. Thanks for sharing the links.
Quote from yobo:
Ok let's get back to business. Here's a thought about correlation. Would like to hear others that have a statistical background.
By definition correlation is a statistical measure of how two securities move in relation to each other and is based on a linear relationship.
The higher the correlation the more likely a 1% move is matched by a 1% move in the other stock within the pair. Correlation is therefore a measure to consider to eliminate risk...
However correlation does not measure the probability of the pair reverting back to the mean. So how does one measure the probability of a pair reverting back the mean?
I also think one could make an argument that correlation does not eliminate volitilty and perhaps a better measure for screening pairs to maintain a market neutral position would be to consider the BETA spread between the pair.
So if we are all chasing alpha returns, why are we even considering correlation in our screening process for pairs?
neveragain, ive done tests on eft's, indices etc... found high winning rate, however lower profit per trade, but I guess you could you use size and scale down as you suggest as tail risk in those spreads are almost non-existant.
I think correlation is a good & simple tool to see how well two shares have moved in unison historically, but like many suggest a high correlation doesn't equal a good pair to trade, like you say yobo there is a difference between correlation and reversion to the mean probability, i have a few pairs that have above 85% correlation, however I wouldn't trade them as there 2 stocks in different industries. Also all statistical tests are done looking back, we have to trade the hard right edge of our charts and look into the future, looking at historical data is a good tool amongst other tools, however relying on it soley is like driving around with a 10yr old street map, things are still the same, however there are subtle differences.
There has too be a bit of common sense in pair trading, for example you may run tests over a pair for eg C/FNM and find highly predictive divergence/convergence oscillations, however you would be gambling to trade this pair going forward. Ive got no financials on my radar at the moment as I think the risk of an outlier event is elevated in that sector. Corporate scandals, concentrated business risk, lawsuits, currency movements, mergers, aquisitions, changes to dividend policy, capital raising, spinoffs, among many other things can affect stock prices going forward that no amount of backtesting will predict.
I think pair trading is a balance of science, art & application.
Quote from BellWeather:
Can you mention the name of the database?
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Closed another trade today for a profit:
Sold GENZ @ 78.05
Covered BAX @ 68.28
Opened new trade today:
Long LOW @ 25.65
Short HD @ 29.15
Open trades: 12
Wins: 9
Losses: 0
Found a interesting newspaper article from 1894, the governors from the NYSE were trying to stop arbitrage trading between NYSE, Philadelphia & Boston stock exchanges.
http://query.nytimes.com/mem/archiv...7CF&oref=slogin
I am starting to trade pairs once again and was looking for some guidance. I want to trade pairs that can possibly be day traded but may last for a few days at most. I am not overly technical stats guy but am looking for names that act similar. The names I am playing right now are somewhat obvious hd/low aapl/rimm but I am also doing a pot/x and slb/cvx. I am hoping to find a few more ideas like the second 2 which are similar but not what most guys on the street are also doing. If anyone has any ideas I would welcome the advice...thanks
Quote from hat8866:
I am starting to trade pairs once again and was looking for some guidance. I want to trade pairs that can possibly be day traded but may last for a few days at most. I am not overly technical stats guy but am looking for names that act similar. The names I am playing right now are somewhat obvious hd/low aapl/rimm but I am also doing a pot/x and slb/cvx. I am hoping to find a few more ideas like the second 2 which are similar but not what most guys on the street are also doing. If anyone has any ideas I would welcome the advice...thanks
thanks will do
went and logged on and the site was loaded with spyware and who knows what else....thanks but no thanks
Quote from hat8866:
went and logged on and the site was loaded with spyware and who knows what else....thanks but no thanks
hat8866, let me know what sector/industry your interested in & and Il do a correlation test in pairtrade finder and post the results.
Closed 2 trades today for a profit
Sold GR @ 49.96
Covered COL @ 49.70
Sold HON @ 47.60
Covered LUK @ 42.03
No new trades today.
Open trades: 10
Wins: 11
Losses: 0
hey very cool journal. You have inspired me to get excel set up and try and start adding some pairs daytrades during the day. Keep up the good work!
How much are you down on your open trades?
Quote from mschey:
How much are you down on your open trades?
Quote from jonnysharp:
Currently down about 3800 on open trades, closed wins are offsetting them though. My open portfolio is concentrated in basic materials which have been very volatile lately, my position sizing reflects that however i'm working on setting exposure limits to sectors now. Ive noticed most of my trades go against me for awhile before coming back, i'm currently looking at incorprating a layering component in my trading plan, by looks of it I would be up more atm if I had layered.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Atm, I don't use stops, I just wait for an exit signal. I'm looking into stops and may incorprate them into my trading plan in the future.
Opened 2 new trades today;
Long CCI @ 33.77
Short AMT @ 38.78
Long TOL @ 25.00
Short PHM @ 16.38
Id like to thank everyone for their ongoing contributions, Ive got heaps of ideas that I'm working on to improve my pair trading.
Quote from jonnysharp:
Atm, I don't use stops, I just wait for an exit signal. I'm looking into stops and may incorprate them into my trading plan in the future.
Opened 2 new trades today;
Long CCI @ 33.77
Short AMT @ 38.78
Long TOL @ 25.00
Short PHM @ 16.38
Id like to thank everyone for their ongoing contributions, Ive got heaps of ideas that I'm working on to improve my pair trading.
I received entry signals for them. Also correlation charts are in an uptrend and above 90%. Ratio charts are in a trading range and are currently around previous reversal zones.
Quote from jonnysharp:
Currently down about 3800 on open trades, closed wins are offsetting them though.
Open trades: 10
Wins: 11
Losses: 0
I haven't booked any losses, only wins, what I meant is my open trades are currently in the red.
Be careful not to let one bad trade take out all of your profits. Remember you can be right 80% of the time but that still leaves %20 losing trades. Don't let these trades take out all of the positive gains.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Thanks Midas, my trade sizes are small to keep the damage from such an event to a minium.
Closed 2 trades today, both at a profit;
Sold MBT @ 64.35
Covered TII @ 12.73
Sold IR @ 35.95
Covered ITW @ 47.67
No new trades today.
Open trades: 10
Wins: 13
Losses: 0
Have a great weekend everyone.
Interesting article from 1988 on Goldman Sachs halting Index Arbitrage in their own accounts. The perception at the time was that program trading was the cause of the '87 crash. http://query.nytimes.com/gst/fullpa...&pagewanted=all
its days like today that i am glad i hedge
Quote from gehko:
its days like today that i am glad i hedge
Quote from yobo:
Morning Gehko,
I think you mentioned you trade with Bright's Vancouver group. Just curious as to what the difference is between trading with them versus being direct with Bright?
Thanks for the insight.
Quote from jonnysharp:
Interesting article from 1988 on Goldman Sachs halting Index Arbitrage in their own accounts. The perception at the time was that program trading was the cause of the '87 crash. http://query.nytimes.com/gst/fullpa...&pagewanted=all
Quote from gehko:
not me bro, maybe you were thinking of Midas.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Crazy day in the markets, really glad I haven't been trading the financials, AIG, FNM, FRE, LEH, MER, BAC, C have all made crazy moves lately, get caught on wrong side and ouch. Needless to say my open positions are experiencing high volatility & no exit or entry signals today. The whole financial system seems to be buckling at the knees. Interesting times.
Found a good site for Pair trading information, it's actually a page full of links.
http://finance.martinsewell.com/pairs-trading/
Has anyone used options for pair trading? like sell a put on the long stock & sell a call on the short stock, or buy a call & put?
Jonny,
Wondering how the spreads on your open trades reacted today??
Anything out of the ordinary or business as usual??
My spreads in the energy sector are very volatile and currently at wide spreads, today was not nice, however if volatility subsides or we get a bounce in the markets they should tighten based on previous movements in the General Market. I'm currently working on new rules. I'm looking at the stocks I hold and what they did on previous big market move days and learning more & more how they react, I might start a database to record my findings.
Quote from jonnysharp:
Found a good site for Pair trading information, it's actually a page full of links.
http://finance.martinsewell.com/pairs-trading/
Has anyone used options for pair trading? like sell a put on the long stock & sell a call on the short stock, or buy a call & put?
Quote from jonnysharp:
Found a good site for Pair trading information, it's actually a page full of links.
http://finance.martinsewell.com/pairs-trading/
Has anyone used options for pair trading? like sell a put on the long stock & sell a call on the short stock, or buy a call & put?
Cointegration is the econometric tool used to measure reversion to the mean. It can be a complex idea for non statisticians. I have also read some stuff on Pearson Correlation which is a variation of standard corr. However, correlation is NOT the best measure IMO but obviously it works somewhat. Take a simple example:
1) Stock 1 @ 10, Stock 2 @ 10,
2) the next instance Stock 1 @ 50, Stock 2 @ 10,
3) next instance Stock1 @ 10, Stock 2 @10.
Correlations probably would be terrible but its great mean reversion. Very simple example.
Now honestly, I think you can mostly skip the entire correlation AND cointegration, who cares? You want to make money, just backtest historical pairs to see if is profitable. Since we are just extrapolating historical data in the future, IMHO a backtest of profitability is suitable enough.
What interests me is diversion trading, can someone give examples or a framework on divergent pairs that they trade? TY!
Edit:
Yobo,
Have you tested or traded option pairs, what was your experience on profitability/drawdowns. It seems you only bot options with low vol (hence constricting BBands)? Perhaps selling vol (sell call, sell put with Delta exposure in desired direction) would work well in a high vol environment?
thanks gehko & yobo, interesting views there.
knocks, funny you say that because I looked at co-integration, correlation, etc.....and came to same conclusion if the pair produces good profits historically then It must wiggle back and forth consistently, correlation is just a good tool to confirm there is a statistical relationship confirmed by fundamentals. However I incorprated a uptrending correlation chart into my signal filters, I find this reduces the downside risk of a trade, since a weakening relationship tends to lead to more divergence, most of my open trades showing losses were taken on strong downtrending correlation charts when I didn't have that filter.
One new trade today:
Long GR @ 47.60
Short COL @ 51.16
Quote from jonnysharp:
thanks gehko & yobo, interesting views there.
knocks, funny you say that because I looked at co-integration, correlation, etc.....and came to same conclusion if the pair produces good profits historically then It must wiggle back and forth consistently, correlation is just a good tool to confirm there is a statistical relationship confirmed by fundamentals. However I incorprated a uptrending correlation chart into my signal filters, I find this reduces the downside risk of a trade, since a weakening relationship tends to lead to more divergence, most of my open trades showing losses were taken on strong downtrending correlation charts when I didn't have that filter.
Another volatile day, VIX @ 35.
Closed 1 trade today for a nice profit;
Sold TOL @ 23.95
Covered PHM @ 14.37
One new trade today:
Long HNZ @ 51.03
Short GIS @ 69.92
Open trades: 11
Wins: 14
Losses: 0
I'm staying away from financials for the rest of the year at least and I'l probably stay away from the energy complex for awhile too. Volatilty and tail risk in these sectors are too high.
I've been getting hammerd this week on my pairs.
It seems like one stock in the pair does nothing and the other stock in the pair goes bonkers.
Luckily with the increased volatility it hasn't been too hard to get back the losses and then some.
how is everyone else doing?
Quote from gehko:
I've been getting hammerd this week on my pairs.
It seems like one stock in the pair does nothing and the other stock in the pair goes bonkers.
Luckily with the increased volatility it hasn't been too hard to get back the losses and then some.
how is everyone else doing?
Quote from gehko:
I've been getting hammerd this week on my pairs.
It seems like one stock in the pair does nothing and the other stock in the pair goes bonkers.
Luckily with the increased volatility it hasn't been too hard to get back the losses and then some.
how is everyone else doing?
Quote from GGSAE:
I would be having an amazing week but i've been doing all kinds of stupid shit going extra long and extra short, if i just stick to scalping my pairs i would be cleaning up....tabernac!
I'll probably be flat afer paying all those juicy bright commissions.
Quote from GGSAE:
I would be having an amazing week but i've been doing all kinds of stupid shit going extra long and extra short, if i just stick to scalping my pairs i would be cleaning up....tabernac!
I'll probably be flat afer paying all those juicy bright commissions.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Quote from Midas:
GGSAE,
What pairs do you like to scalp?
Quote from yobo:
GGSAE,
Are you the one who trades through the Bright Vancouver office? Just curious as to how things are different, deal wise versus being directly under Bright.
Thanks.
yeah I don't think sudden & significant increases in volatility is good for open spreads because we are basing are calulations on past data when volatility was lower, however might be a good time to put on spreads. I'm finding pair trading to be very similar to selling premium. Also with turmoil in many markets hedge funds are being swamped with redemptions which means exiting positions across the board, including their statistical arbitrage trades at a loss hence increasing the divergence's currently occurring just like we had back in August last year when big funds were reporting 25 sigma events happening that were only suppose to happen once every 100,000 years. I think commodities coming off hard & fast caught a lot of funds off-guard which in turn lead to pressure on the IB's that were funding them, which created a halo effect and now we have wall street playing musical chairs except there's 1 chair for every 5 players and the music has stopped. Sell the rallies could be the mantra for a long time to come. Well that's my take on it anyway.
Exited one trade today for a profit;
Sold LOW @ 24.21
Covered HD @ 26.73
One new trade today;
Long BAX @ 66.42
Short GENZ @ 80.39
Open trades: 11
Wins: 15
Losses: 0
I don't know johhny, i've heard from many people that once you learn how to scalp pairs then you really know how to trade and after awhile these conditions are like printing money...there's a guy here that did a million shares in a day, the opportunities in a market like this are endless.
GGSAE, I agree atm day traders would be having a ball, those intra-day moves look like 10 year SP charts, even 30sec charts are making some very nice, liquid moves. I definately want to get into intraday pairs trading as a additional trading plan to my existing swing pair trading plan. Kudos to the guys that do it everyday.
Stat Arb Cleaning Up
Lots of independent corroboration that stat arb is making a lot of money in this tumult. Stat arb is basically trading based on the theme that stocks mean-revert over short horizons, and is based on statistical patterns. When applied to hundreds of stocks simultaneously, it has very low volatility. DE Shaw, Morgan Stanley, and Renaissance, are big players.
Anyway, for everyone selling indiscriminately in panic, their are lots of millionaires in hedge funds saying, 'thanks!' Note the lack of any large hedge fund blowing up in this mess.
I can corrobarate these on an intraday basis.
Just like to give a big shoutout to Paulson & Benanke for giving my portfolio such a magnificant boost today, nothing like a good ole government intervention to save the day, thanks guys.
Closed one trade today for profit;
Sold CCI @ 35.33
Covered AMT @ 39.71
Open trades: 10
Wins: 16
Losses: 0
Have a great weekend everyone.
First time in a week that my moc's filled "normal" instead of completely off whack.
I didnt even bother setting up pairs for friday or over the weekend.
I have all of my finance pairs blacklisted on my spreadsheet in case for some reason i fall asleep at the wheel ;)
We'll see how this week goes...
Closed one trade today for a small loss;
Sold MUR @ 73.79
Covered APA @ 116.28
Open trades: 9
Wins: 16
Losses: 1
how are the open trades doing?
Yes open trades are showing a loss, however most of them show a loss before coming back to their mean. One pair ROK/WY is the bulk of my open loss's, it has diverged quite some more since i put on the spread, however trade management looks after that and it will come back eventually.
I was just wondering what the size of losers is looking to be compared to winners. Keep up the good work!
Thanks baggerlord.
Closed one trade today for a loss;
Sold GG @ 35.77
Covered AEM @ 64.05
Opened new trade today;
Long APA @ 113.65
Short DVN @ 102.15
Open trades: 9
Wins: 16
Losses: 2
Quote from jonnysharp:
Yes open trades are showing a loss, however most of them show a loss before coming back to their mean. One pair ROK/WY is the bulk of my open loss's, it has diverged quite some more since i put on the spread, however trade management looks after that and it will come back eventually.
Johnny.
You have a great thread going.
I'm just wondering how exactly you minimize the slippage on the opening gap for pairs.
Also do you wait for both pairs to officially open before you play the gap move?
Thanks
GGSAE, part of my trade management is to size according to underlying volatility, so this pair has less size on than the others due to volatility.
Thanks Sky, not sure what you mean re opening gaps since i only put my trades on in the last 30mins of the trading day where prices are more stable and liquidity is ample.
Quote from jonnysharp:
GGSAE, part of my trade management is to size according to underlying volatility, so this pair has less size on than the others due to volatility.
Thanks Sky, not sure what you mean re opening gaps since i only put my trades on in the last 30mins of the trading day where prices are more stable and liquidity is ample.
Quote from GGSAE:
Okay so the open loss is more or less insignificant overall? Also wondering why you put positions on in the last 30 minutes.
Opened one trade today;
Long CNX @ 52.85
Short ACI @ 40.17
Open trades: 10
Wins: 16
Losses: 2
Quote from jonnysharp:
Opened one trade today;
Long CNX @ 52.85
Short ACI @ 40.17
Open trades: 10
Wins: 16
Losses: 2
GGSAE, yes i realise. I'm playing the technicals on this one. Would be good if we both could profit, time will tell. What's your holding period?
CNX had guidance today...Dont know how you view that, but I guess its better then putting the position on before today.
I view guidance the same as earnings when it comes to pairs.
johnny what's your average gain for the winners and loss for the losers so far? having a high probability is great, but it's difficult to tell the whole picture without knowing the actual gain/loss numbers.
thanks
reho, i know, i'm betting on a high correlation and technicals with this pair.
newguy, my losses were 3.04% & 6.01% of the trade value, avg winner is 3.72% of trade value. trade size/value is relative to pair volatility.
I was reviewing your ROK/WY trade. I'm trying to figure out if you are calculating correlation by raw prices or returns of prices.
I don't understand what in the real world this correlation represents. Do you construct factor models to regress against the indices and then take the correlation of the resulting residuals? If there's no news driven activity on the two stocks, how do we know that the correlation between the two stocks isn't just due to moving with the major indexes?
Can we review your reasons for this trade, what your signal was, when and why? Just as a learning exercise?
If the tone of my post sounds critical, pardon me -- it's not. I'm trying to understand your methodology.
I don't construct factor models or do any of the dirty work, i choose what signals to take from pairtrade finder and then manage the trade myself, the rok/wy trade has gone against me quite some atm, as ive discussed previously i added a correlation filter to my signals to make sure i only take trades on increasing correlation which rok & wy didn't have. position trading is my main game, pair trading is something ive branched into in the last several months, and there have been some qualitity insights in this thread from a few experts, so i'm constantly tweaking & adjusting my trading plan as I learn, the past couple of weeks have taught me a lot and how well risk management deals with the unknown.
Quote from lolatency:
I was reviewing your ROK/WY trade. I'm trying to figure out if you are calculating correlation by raw prices or returns of prices.
I don't understand what in the real world this correlation represents. Do you construct factor models to regress against the indices and then take the correlation of the resulting residuals? If there's no news driven activity on the two stocks, how do we know that the correlation between the two stocks isn't just due to moving with the major indexes?
Can we review your reasons for this trade, what your signal was, when and why? Just as a learning exercise?
If the tone of my post sounds critical, pardon me -- it's not. I'm trying to understand your methodology.
Quote from jonnysharp:
I don't construct factor models or do any of the dirty work, i choose what signals to take from pairtrade finder and then manage the trade myself, the rok/wy trade has gone against me quite some atm, as ive discussed previously i added a correlation filter to my signals to make sure i only take trades on increasing correlation which rok & wy didn't have. position trading is my main game, pair trading is something ive branched into in the last several months, and there have been some qualitity insights in this thread from a few experts, so i'm constantly tweaking & adjusting my trading plan as I learn, the past couple of weeks have taught me a lot and how well risk management deals with the unknown.
Quote from jonnysharp:
GGSAE, yes i realise. I'm playing the technicals on this one. Would be good if we both could profit, time will tell. What's your holding period?
Quote from garbageman:
Can you post the formula/math behind your correlation indicator? Are you normalizing prices to returns, or just finding correlation between raw closing prices?
Closed one trade today for a profit;
Sold HNZ @ 51.38
Covered GIS @ 68.85
Opened 1 new trade today;
Long GG @ 33.48
Short ABX @ 37.00
Quote from jonnysharp:
yeah I don't think sudden & significant increases in volatility is good for open spreads because we are basing are calulations on past data when volatility was lower, however might be a good time to put on spreads. I'm finding pair trading to be very similar to selling premium. Also with turmoil in many markets hedge funds are being swamped with redemptions which means exiting positions across the board, including their statistical arbitrage trades at a loss hence increasing the divergence's currently occurring just like we had back in August last year when big funds were reporting 25 sigma events happening that were only suppose to happen once every 100,000 years. I think commodities coming off hard & fast caught a lot of funds off-guard which in turn lead to pressure on the IB's that were funding them, which created a halo effect and now we have wall street playing musical chairs except there's 1 chair for every 5 players and the music has stopped. Sell the rallies could be the mantra for a long time to come. Well that's my take on it anyway.
Exited one trade today for a profit;
Sold LOW @ 24.21
Covered HD @ 26.73
One new trade today;
Long BAX @ 66.42
Short GENZ @ 80.39
Open trades: 11
Wins: 15
Losses: 0
__________________
Profits are a byproduct of proper risk management.
Curious if anyone noticed the response today to stat arb intraday?
Volatility at the open was followed by an immediate lull as everyone waited for the Bail Out decision and created low volatility but trending (downward) prices. Many of the intraday spreads I trade widened significantly and held until after the decision whereupon there were a number of opportunities.
Reminds me of something written on the downturn in stat arb during 01-03, theory was proposed that it was due to lack of institutional involvement and program/algo trading that caused spreads to widen and delayed reversion causing opportunity cost, perhaps today was a microcosm of that argument??
Quote from gtgtgt3:
Just founds this thread. Very interesting!! I trade intraday pairs with The IPTS at www.daytradepairs.com The only downside is that you need Tradestation to run it.
__________________
Profits are a byproduct of proper risk management.
knocks, yes there have been some strange happenings in the pair trading world, these extraordinary events must be having an impact like you say, good opportunities for those who could identify them.
Nick, yes pairtrade finder has spread charts, however I don't use them.
Exited one trade today;
Sold HAL @ 30.29
Covered CNQ @ 64.10
One new trade today;
Long PHM @ 13.91
Short TOL @ 24.31
Quote from jonnysharp:
knocks, yes there have been some strange happenings in the pair trading world, these extraordinary events must be having an impact like you say, good opportunities for those who could identify them.
Nick, yes pairtrade finder has spread charts, however I don't use them.
Exited one trade today;
Sold HAL @ 30.29
Covered CNQ @ 64.10
One new trade today;
Long PHM @ 13.91
Short TOL @ 24.31
Yobo, yes that was some crazy trading in GOOG this afternoon. Interesting how you use RSI extensively in your trading, nice method you got there.
Busy day in the pair trading world.
Closed 3 trades:
Sold BAX @ 65.5
Covered GENZ @ 77.67
Sold AKS @ 25.92
Covered MT @ 49.38
Sold APA @ 104.67
Covered DVN @ 92.11
One new trade today;
Long NWS-A @ 11.99
Short IACI @ 17.30
Quote from yobo:
Interesting Pair Johnny with the PHM and TOL. It is one I track as well. I had the reverse on today and did well with it.
Several weeks ago, I added a new screening criteria to my system. In addition to looking for pairs that have deviated more than 2x away from the mean, I also look for pairs who are trading within 0.25 stddev from the mean, 80% correlation, and whose 14 day RSI spread is greater than 7%. I also want the the average RSI to be above 40 and less than 60. I then pick the stronger stock to go long according to RSI.
For example: PHM/TOL
1. Correlation = 95%
2. PHM 14RSI = 41
3. TOL 14RSI = 50
4. RSI Spread = .09 or 9%
5. Average RSI = 46
6. Pair ratio within .25 STDdev of the mean. Mean = .57 and the pair ratio at yesterday's close was .569
I have only been trading this criteria for about three weeks, but I find I can open the trade in the morning and close for a nice profit by the day's end or hold it if I choose.
Just another way to look at pairs, but the strategy seems to work. I find mean reversion can take a long time so I wanted to find another way to identify opportunities.
***How about the craziness in goog today. I was one of the shareholders during the mayhem and almost had a heart attack as I was long at 415 and watched it hit 489 and then drop to pennies all within minutes. I got real lucky and put a market order to sell because I panicked, but got filled at 424.04 which the NAZ accepted as valid. A quick 6500 in profit, but the scariest profit I ever made. Another reason to stick with pairs. They helps you sleep at night.
Cheers.
Yobo,
Very cool way of looking at pairs. Could you post some more examples?
No alerts for this type of trade today based on yesterday's close available in my database. But if you have any questions about the strategy, I'd be happy to elaborate.
The concept is actually very simple. Buy correlated pairs when they are at the mean, but be long the stronger stock and short the weaker based on 14 day RSI. The RSI spread becomes important because when the market hits a volitle patch, investor sentiment will almost 100% of the time sell the weaker first creating a profit opportunity. The reverse is true in a strong market. Investors will buy the stronger first and the weaker will follow but not at the same rate.
The other piece of the puzzle is to make sure you avoide a short squeeze or over bought condition hence the reason for the average RSI being above 40 and less than 60.
Quote from knocks420:
Curious if anyone noticed the response today to stat arb intraday?
Volatility at the open was followed by an immediate lull as everyone waited for the Bail Out decision and created low volatility but trending (downward) prices. Many of the intraday spreads I trade widened significantly and held until after the decision whereupon there were a number of opportunities.
Reminds me of something written on the downturn in stat arb during 01-03, theory was proposed that it was due to lack of institutional involvement and program/algo trading that caused spreads to widen and delayed reversion causing opportunity cost, perhaps today was a microcosm of that argument??
Closed one trade today;
Sold MOS @ 68.64
Covered POT @ 127.89
One new trade opened;
Long OMC @ 37.41
Short TV @ 22.16
Quote from knocks420:
Yesterday was a fine day but today was sh*t again, very low intra-stock volatility. Spreads of stocks i watch widened in the am and oscillated at new levels-never really reverting. I'm sitting on unrealized losses which is not the norm but felt reluctant to take the loss since the individual spreads were at extreme levels on lower frequencies.
As I wrote above, this day fit the thesis that returns are lower with lack of institutional participation and algo trading. It seemed that the index moved quite a bit but few people trading stocks, combine with low volume due to the holidays and continued apprehension going into Senate meeting and you get a sh*t day.
Other research i've seen on simple overbought/oversold fading strategies also seemed to underperform during economic stress or uncertainty. My 2 cents is to reduce size when forecasting decreased intra-stock vol. I wonder what the thoughts are on this strategy going forward?
Quote from samueldoernte:
I got caught in several pairs like that today, it was frustrating to say the least, but tight spreads allow you to trade the stocks of the pair individually and weight yourself to the movements of the market. As the market began to trend upwards I was able to get extra long several pairs, some of which i took profits on my long positions and others which i waited and then shorted giving me a great spread price. Bkc/Mcd200 and Cop/Cvx finally turned for me the last hour or so of the day. With the $VIX this high I look to run and gun rather than build positions, tending to daytrade rather than carry overnight pairs positions. Tighter, higher correlated spreads have offered great oppurtunities with high volatility like pbr/pbr.a and rio/rio.pr. The tight spreads offer some safety if you get whipsawed.
johnnysharp,
Thanks for the journal, and best wishes for continued success! I am currently paper trading the signals from Pairtrade Finder, and I wonder if I could bother you for some software details. Have you changed any of the default Preferences settings in the software? Specifically, I'm wondering if you have changed the correlation and standard deviation lookback settings from their default of 100 days? The reason I ask is that I am not getting some of the signals you have posted, although I seem to be looking at some of the same pairs. One more: What criteria did you use when you were deciding what symbols to enter into the system in the beginning? Thanks in advance for any suggestions you might have.
mousejockey
Quote from knocks420:
Interesting. I too am sticking with intraday trading reversion but I will keep overnight and possibly add to positions if it aligns on a longer timeframe.
It seems that you convert your pair into a directional/dispersion trade should the market start making a move? I think I understand, if you'll humor me:
Say your short XYZ/long ABC, you see the market breaking out, will you add to ABC OR perhaps cover XYZ and re-short at a higher price? Or some other combination? Thanks in advance.
Couldn't resist this pair trade...
Long MOS 40.94
Short MON 80.58
MOS is taking it on the chin. I'm a little bit early on the trade, but we'll see.
Quote from samueldoernte:
Correct, however i usually like to add to the position rather than take off a position since i am probably in the position at a good spread price, I'd rather not jeopardize that good position by taking one side off in case im wrong. This strategy only works well when your spread is far enough out that you feel comfortable adding to your position.
Opened one new trade today;
Long CE @ 22.87
Short APD @ 64.04
Quote from mousejockey:
johnnysharp,
Thanks for the journal, and best wishes for continued success! I am currently paper trading the signals from Pairtrade Finder, and I wonder if I could bother you for some software details. Have you changed any of the default Preferences settings in the software? Specifically, I'm wondering if you have changed the correlation and standard deviation lookback settings from their default of 100 days? The reason I ask is that I am not getting some of the signals you have posted, although I seem to be looking at some of the same pairs. One more: What criteria did you use when you were deciding what symbols to enter into the system in the beginning? Thanks in advance for any suggestions you might have.
mousejockey
Quote from yobo:
Couldn't resist this pair trade...
Long MOS 40.94
Short MON 80.58
MOS is taking it on the chin. I'm a little bit early on the trade, but we'll see.
yobo, I think everyone is feeling a little pinch from the un-precented turmoil currently present in all markets, however just like a good pair though things will return to normal and make us some money on the way, we just have to ride out the storm. Like the joker said in the dark knight ''the night is always the darkest just before dawn''
Just closed my best pair trade today for good profits;
Sold OMC @ 35.96
Covered TV @ 19.36
Opened one new trade today;
Long ALTR @ 18.84
Short XLNX @ 22.02
One thing I'm starting to notice is that the bad trades are when you trade against the ratio trend. In my attachment you will see the ratio chart in the top left hand corner of the charts, I think I want to always trade in the overall direction of that chart unless its ranging then I want to buy support and sell resistance. That way I'm always long the technically strongest stock and short the technically weakest stock.
Sorry, I haven't read all 6 pages yet....
Why is there not a software review of the "pairtradefinder" as talked about in this thread?
Site looks decent and I will take a look at the free trial, but I'm surprised at no reviews...unless I missed it.
Thanks.
Quote from Trvlwanderer:
Sorry, I haven't read all 6 pages yet....
Why is there not a software review of the "pairtradefinder" as talked about in this thread?
Site looks decent and I will take a look at the free trial, but I'm surprised at no reviews...unless I missed it.
Thanks.
Quote from jonnysharp:
Do you mean a review in this thread or a review in the software section of elitetrader?
Quote from jonnysharp:
yobo, I think everyone is feeling a little pinch from the un-precented turmoil currently present in all markets, however just like a good pair though things will return to normal and make us some money on the way, we just have to ride out the storm. Like the joker said in the dark knight ''the night is always the darkest just before dawn''
Just closed my best pair trade today for good profits;
Sold OMC @ 35.96
Covered TV @ 19.36
Opened one new trade today;
Long ALTR @ 18.84
Short XLNX @ 22.02
One thing I'm starting to notice is that the bad trades are when you trade against the ratio trend. In my attachment you will see the ratio chart in the top left hand corner of the charts, I think I want to always trade in the overall direction of that chart unless its ranging then I want to buy support and sell resistance. That way I'm always long the technically strongest stock and short the technically weakest stock.
anyone wanna post or start a review thread for the software mentioned (pairtradefinder dot com)?
yobo, my closed trades show a nice profit and my open trades also show nice losses thanks to the recent turmoil, so my a/c is down 3.6%(closed & open p/l) since starting this journal which is a lot better than down 16% on the sp500. with lower volatility & exposure aswell, so you could say im outperforming the market averages significantly which is achieving my primary objective. I have noticed my current portfolio has a weakness bias to the market going down, something il have to investigate further to see if i can improve on.
trvl, id be happy to contribute to a review thread for pairtrade finder. i know there are a couple of other users on here aswell that im sure would add their opinons.
Quote from jonnysharp:
yobo, my closed trades show a nice profit and my open trades also show nice losses thanks to the recent turmoil, so my a/c is down 3.6%(closed & open p/l) since starting this journal which is a lot better than down 16% on the sp500. with lower volatility & exposure aswell, so you could say im outperforming the market averages significantly which is achieving my primary objective. I have noticed my current portfolio has a weakness bias to the market going down, something il have to investigate further to see if i can improve on.
trvl, id be happy to contribute to a review thread for pairtrade finder. i know there are a couple of other users on here aswell that im sure would add their opinons.
Quote from jonnysharp:
yobo, my closed trades show a nice profit and my open trades also show nice losses thanks to the recent turmoil, so my a/c is down 3.6%(closed & open p/l) since starting this journal which is a lot better than down 16% on the sp500. with lower volatility & exposure aswell, so you could say im outperforming the market averages significantly which is achieving my primary objective. I have noticed my current portfolio has a weakness bias to the market going down, something il have to investigate further to see if i can improve on.
trvl, id be happy to contribute to a review thread for pairtrade finder. i know there are a couple of other users on here aswell that im sure would add their opinons.
gehko, could you please expand on beta weighting? sounds interesting.
yobo, yes that makes sense thanks, I think your theory may be right about my downside bias.
Closed 1 trade today for good profit;
Sold CNX @ 37.21
Covered ACI @ 24.98
Opened 1 new trade;
Long GRS @ 6.23
Short EGO @ 6.02
Open trades: 9
Closed wins: 21
Closed losses: 5
Quote from jonnysharp:
Closed 1 trade today for good profit;
Sold CNX @ 37.21
Covered ACI @ 24.98
Opened 1 new trade;
Long GRS @ 6.23
Short EGO @ 6.02
Open trades: 9
Closed wins: 21
Closed losses: 5
Quote from forsalenyc:
Johnny, as a fan of your thread, I want to ask you if you're convinced that Pairtrading is the way to go, or vice versa? I still pairtrade occasionally, but I try to keep it intraday.
In one of the posts, you quoted that you're down so far using this strategy. well, when I actively pairtraded, I was 39-0. and when it became 39-2, it pretty much wiped out all my gains. I reckon its the case with you.......running the losing pairs. it's also becoming harder now that tighter leverage is enforced on overnites. I hope you succeed as I'm looking for source of inspiration in pairtrading
Quote from jonnysharp:
gehko, could you please expand on beta weighting? sounds interesting.
yobo, yes that makes sense thanks, I think your theory may be right about my downside bias.
do you ever do these futures trades
ES/NQ
YM/NQ
YM/ES
thanks gehko that makes sense now,
increasenow, i don't pair trade futures that game is pretty much zipped up by large funds, not much room for competition there, plus there plenty of good stock pairs out there.
Opened 2 new trades today;
Long MOT @ 4.56
Short JNPR @ 16.76
Long APA @ 71.80
Short MUR @ 50.00
Closed my best pair trade again on Friday.
Sold GRS @ 5.56
Covered EGO @ 4.31 (I shorted EGO at 6.02 two days ago)
Sold GR @ 31.94
Covered COL @ 36.23
Opened 1 new trade:
Long DGX @ 40.38
Short DVA @ 46.94
Yeah baby! Those nasty open losing trades finally came back and closed them at reasonable size loss's.
Sold ROK @ 29.95
Covered WY @ 47.48
Sold FCX @ 45.37
Covered BHP @ 43.98
Sold GG @ 24.85
Covered ABX @ 28.12
Open trades: 7
Win %: 71
Win:Loss 0.64
Continuing to outperform the SP500.
ack you should have held the bhpfcx, i'm still holding a bunch, has a lot of retracement to go!
Exited one trade Wednesday;
Sold ALTR @ 16.95
Covered XLNX @ 19.49
Pairtrade Finder
Jonnysharp,
This is an excellent forum, thanks for maintaining the effort.
I am looking to demo Pairtrade Finder and have a question.
It uses Yahoo & Comsec as data providers.
Doesn't this mean that all of your generated signals are produced by data that is 15 mins old?
cheers
Re: Pairtrade Finder
Quote from irucken:
Jonnysharp,
This is an excellent forum, thanks for maintaining the effort.
I am looking to demo Pairtrade Finder and have a question.
It uses Yahoo & Comsec as data providers.
Doesn't this mean that all of your generated signals are produced by data that is 15 mins old?
cheers
jonnysharp,
I was wondering if you have an opinion as to which indicator is your best guide to mean reversion. Is it the high and increasing correlation, or RSI? Your latest spread, HD-LOW seems to be in the middle of its range. Don't you prefer to put a spread on when its near its channel extreme? Also do you find the volatility indicator useful? thanks
Also, since it seems so many spreads go against you initially, what do you think of waiting for spreads to get uglier before putting them on? I am unsure of what is better... counting on spreads to mean revert, or playing them to continue once they blow past their channel boundaries.
It seems some days they all revert beautifully, then the next day most spreads just keep getting wider.
Little to no opportunities it seems this last week on intraday pairs although a few daily pairs converged significantly.
Deviation occured but hardly any snap back so ended the week slightly negative all in. Unsure if theres anything to be learned other then chalk it up to poor conditions since the indices themselves seemed quite volatile.
Closed my best pair trade on thursday and showing significant profits since starting this journal;
Sold MOT @ 5.61
Covered JNPR @ 16.58
Opened one trade today;
Long HES @ 50.58
Short APC @ 33.50
Open trades: 6
Wins: 25
Losses: 8
Quote from dazzy:
jonnysharp,
I was wondering if you have an opinion as to which indicator is your best guide to mean reversion. Is it the high and increasing correlation, or RSI? Your latest spread, HD-LOW seems to be in the middle of its range. Don't you prefer to put a spread on when its near its channel extreme? Also do you find the volatility indicator useful? thanks
Also, since it seems so many spreads go against you initially, what do you think of waiting for spreads to get uglier before putting them on? I am unsure of what is better... counting on spreads to mean revert, or playing them to continue once they blow past their channel boundaries.
It seems some days they all revert beautifully, then the next day most spreads just keep getting wider.
Just a quick update on my progress so far since starting this journal.
Wins 25
Losses 9
Win % 73.5%
Win:loss 0.71
Ive outperformed the SP500 by a whopping 46% since starting this journal also with significantly less volatility & exposure. It's amazing how you only need a small edge to crush the market averages. Pairtrade Finder has been a great tool to give me all these signals and I'm really happy with my performance so far. I will try and not get complacent and keep consistently taking signals I like day in day out. Thanks everyone for your ongoing support, this journal has helped me stay discliped and I have been offered some very useful ideas that have improved my trading.
Have a great week.
That is amazing and impressive, especially considering the recent market turmoil! Congratulations!
Could you provide some more statistical info, such as drawdowns, et. al? I am thinking of, after completing my current project, working on quantitatively and automatically trading pairs both intraday and longer term, as you are.
I've been following this journal with great interest, keep up the great work,and again, congratulations!
do u sell/cover or buy/short stock @ the same time or wait for some indicators before jumping?
thanks
__________________
MY POINT
Hey Johnny cash, Sounds like you are a very satisfied since you are beating the S&P. My question to you though is that the last time you posted your P&L you mentioned you were carrying losses and underwater, but albeit less than the S&P.
Typically traders are in the game to make money everyday/month or at least be profitable enough to support oneself and family. In otherwords, if the S&P is down 45% and you are only down 5%, despite your positive spin you are still down 5%. Hard to make a living that way.
So far you have proven you can lose less than the index with a lot of work monitoring your positions every day, but you have yet to show you can make money/a living.
What are your thoughts about that? And using pair trades to make a living from versus just outperforming the S&P on a relative basis.
Jonny,
Great Journal, very inspiring. Congratulations on getting green!
Can you elaborate a bit on how you identify pairs? What is your filtering technique that helps you decide to add a ticker to the pairtrader db?
Great work jonnysharp
but as others have noted here winning percentages are misleading. there are systems that win 70% and lose money while others with only 40% winners or less go on to be winning strtergies. A good start mind you but it would be interesting
to seeing an update P/L side.
Isn't this inportant to you?
cheers
john
Quote from yobo:
Hey Johnny cash, Sounds like you are a very satisfied since you are beating the S&P. My question to you though is that the last time you posted your P&L you mentioned you were carrying losses and underwater, but albeit less than the S&P.
Typically traders are in the game to make money everyday/month or at least be profitable enough to support oneself and family. In otherwords, if the S&P is down 45% and you are only down 5%, despite your positive spin you are still down 5%. Hard to make a living that way.
So far you have proven you can lose less than the index with a lot of work monitoring your positions every day, but you have yet to show you can make money/a living.
What are your thoughts about that? And using pair trades to make a living from versus just outperforming the S&P on a relative basis.
Fantastic results!!
Quote from jonnysharp:
Thanks yobo, you have been the most regular contributor to this journal and I appreciate that. Yes several weeks ago I was slighty down, however now Im up 21% so yes I am profitable. I'm not using pair trading to make a living atm, Im using it to grow my capital, although I expect next year or maybe 2010 I can make a living doing this, I would just have to put on more trades per month to increase the probability of being profitable every month, so if I take 15-20trades per month I should be profitable 10 out of 12 months, however if I take 100 trades per month I should be profitable 49 out of 50 months and could use it to make a living plus grow capital.
Quote from yayt:
That is amazing and impressive, especially considering the recent market turmoil! Congratulations!
Could you provide some more statistical info, such as drawdowns, et. al? I am thinking of, after completing my current project, working on quantitatively and automatically trading pairs both intraday and longer term, as you are.
I've been following this journal with great interest, keep up the great work,and again, congratulations!
Quote from gobar:
do u sell/cover or buy/short stock @ the same time or wait for some indicators before jumping?
thanks
Quote from cipherscribe:
Jonny,
Great Journal, very inspiring. Congratulations on getting green!
Can you elaborate a bit on how you identify pairs? What is your filtering technique that helps you decide to add a ticker to the pairtrader db?
Quote from Appleseed:
Great work jonnysharp
but as others have noted here winning percentages are misleading. there are systems that win 70% and lose money while others with only 40% winners or less go on to be winning strtergies. A good start mind you but it would be interesting
to seeing an update P/L side.
Isn't this inportant to you?
cheers
john
Quote from jonnysharp:
Thanks for that.
Not sure I understand your question correctly, so il try my best. I use pairtrade finder to find suitable pairs through backtests and then add pairs based on high correlation and confirm with fundamental correlation(same industry/sector), then just before the market closes each day I open the program and check for signals and choose one's based on my own personal criteria and then wait for the program to give me a exit signal. I don't like to hold too many pairs in the same sector either.
Quote from cipherscribe:
Sorry for my ambiguity.
I have Pairtrader, and i'm following your trades within the application. My question is based around your identification of what tickers to add to the application.
I'm very new to the idea of pair trading, and whilst I understand the concepts behind pair trading, I'd like to know the step prior to that, for example, what makes HES or APC worthy of being added to the Pairtrader app?
Entered one new trade today;
Long TV @ 16.35
Short OMC @ 33.39
Quote from jonnysharp:
Entered one new trade today;
Long TV @ 16.35
Short OMC @ 33.39
OMC / TV
TV is an ADR. In my experience ADRs suck to pairs trade. The overnight gaps are terrible because of the different markets involved. Its not uncommon to have an ADR pairs trade go many std dev from the mean in a couple days for no real reason and never come back.
Quote from ScreenLocal:
Hi Jonnysharp,
very interesting thread!
Do you take an equal amount of shares on both stocks. Or do you trade dollar neutral?
I think I read a post somewhere, where you said you try to look for pairs that have nearly equal prices?
But what would you do on pairs like TV-AMC or HES-APC?
-Screenlocal
Quote from knocks420:
I've contacted Pairstradefinder and suggested that in the new version, the log ratio is used as opposed to stock1/stock2. Using the log ratio allows you to compare stocks with different prices-be cautious trading pairs with different prices until this is incorporated as you can get skewed results.
Quote from cipherscribe:
Is this because lower priced stocks naturally tend to have higher volatility? Does the log ratio equalise the value of the instruments?
Quote from ScreenLocal:
Hi Jonnysharp,
very interesting thread!
Do you take an equal amount of shares on both stocks. Or do you trade dollar neutral?
I think I read a post somewhere, where you said you try to look for pairs that have nearly equal prices?
But what would you do on pairs like TV-AMC or HES-APC?
-Screenlocal
Nice thread and job Jonny.
Just a question : It 's possible of pair trading on Forex Market ?
Because some pair are very correlated by example EURJPY with GBPJPY.
Someone trade pair trading on Forex ?
Regards.
Ludo.
Quote from Surfeur:
Nice thread and job Jonny.
Just a question : It 's possible of pair trading on Forex Market ?
Because some pair are very correlated by example EURJPY with GBPJPY.
Someone trade pair trading on Forex ?
Regards.
Ludo.
Quote from jonnysharp:
I eyeball the ratio chart on the pair analyser tab in the program. I don't want the ratio chart to be trending, I want it to be in a wide trading range that is no bigger than 30% of the ratio, also I don't want to take trades on new ratio highs or lows, and I want to see an general oscillation pattern in the chart aswell. I try and think of it like this, if I were a trend trader what ratio chart would look the ugliest to me, then I wait for a program signal for that pair.
Yes for the spreads getting wider whilst in a trade or waiting for a higher deviation, ive played around with the settings in pairtrade finder and found changing the pair stretch to 2.50 - 3.00(I currently have it at 2.00) there aren't many trades generated and whilst it may improve profit per trade it doesn't improve overall profitability. The beauty about pair trading is you can scale into the pair as it goes against you, something i haven't done yet however I most likely will incorprate it into my trading plan next year after learning the ropes with one layer.
Quote from Trend Fader:
What do you mean by no bigger than 30% of the ratio. Also why do you avoid taking new ratio high/low.
Do you pay attention to market cap size... meaning say one stock is $5bil market cap and the other is $50bil- would you consider this a valid pair?
Closed one trade today for good profits, made 3pts on each side;
Sold HES @ 53.87
Covered APC @ 30.62
No new trades.
Quote from Trend Fader:
Do you pay attention to market cap size... meaning say one stock is $5bil market cap and the other is $50bil- would you consider this a valid pair?
Quote from jonnysharp:
Yes I do, no hard rule in place, I use it on case by case basis, in your example I would want to be long the 5b stock and short the 50b stock to mitigate takeover risk.
Two new trades taken on Friday;
Long XLNX @ 18.06
Short ALTR @ 16.51
Long BIDU @ 191.22
Short GOOG @ 339.29
Quote from jonnysharp:
Two new trades taken on Friday;
Long XLNX @ 18.06
Short ALTR @ 16.51
Long BIDU @ 191.22
Short GOOG @ 339.29
Dollar neutral or voloatility neutral
Johnny, or other pair traders,
Given that there is a correlation between stock price and volatility, would it not seem more reasonable to pair trade based on being volatility neutral, rather than dollar neutral? Or am I way off base here?
And if so, how would one go about that? I was thinking of something around ATR. Would that be reasonable?
Also, does anyone know if Pairtrade Finder uses any cointegration algorithms, or is it all based on correlation?
Cheers,
Adrian
Re: Dollar neutral or voloatility neutral
Quote from cipherscribe:
Johnny, or other pair traders,
Given that there is a correlation between stock price and volatility, would it not seem more reasonable to pair trade based on being volatility neutral, rather than dollar neutral? Or am I way off base here?
And if so, how would one go about that? I was thinking of something around ATR. Would that be reasonable?
Also, does anyone know if Pairtrade Finder uses any cointegration algorithms, or is it all based on correlation?
Cheers,
Adrian
Closed 2 trades today both at a profit;
Sold DGX @ 40.40
Covered DVA @ 46.51
Sold HD @ 18.91
Covered LOW @ 16.85
Opened 1 new trade;
Long APA @ 64.36
Short EOG @ 62.99
Open Trades: 7
Wins: 28
Losses: 8
Quote from ScreenLocal:
Hi Jonnysharp,
Is there a way you can calculate the potential profit if the bidu/goog ratio goes from 0.55 to 0.65?
And would you take BIDU/GOOG 100/100 shares?
-SL
Re: Dollar neutral or voloatility neutral
Quote from cipherscribe:
Johnny, or other pair traders,
Given that there is a correlation between stock price and volatility, would it not seem more reasonable to pair trade based on being volatility neutral, rather than dollar neutral? Or am I way off base here?
And if so, how would one go about that? I was thinking of something around ATR. Would that be reasonable?
Also, does anyone know if Pairtrade Finder uses any cointegration algorithms, or is it all based on correlation?
Cheers,
Adrian
Quote from jonnysharp:
Yes you could calulate the potential profit on that trade, in your example if the ratio went from 0.55 to 0.65 that would be an 18.18% increase in the ratio, so take the $$$ committed to one side and multiply by 0.1818 and that would be the profit.
No im $$$ neutral when I trade, not equal amount of shares.
Quote from ScreenLocal:
So BIDU/GOOG would be something like 175/100 is that correct? Then I understand!
-SL
Quote from jonnysharp:
Thanks yobo, you have been the most regular contributor to this journal and I appreciate that. Yes several weeks ago I was slighty down, however now Im up 21% so yes I am profitable. I'm not using pair trading to make a living atm, Im using it to grow my capital, although I expect next year or maybe 2010 I can make a living doing this, I would just have to put on more trades per month to increase the probability of being profitable every month, so if I take 15-20trades per month I should be profitable 10 out of 12 months, however if I take 100 trades per month I should be profitable 49 out of 50 months and could use it to make a living plus grow capital.
Quote from rjiecs:
thanks everyone who has contributed to this thread. i'd had no idea how to trade pairs in stocks before coming by this thread.
jonny, on 9oct you said you were down 2.9% of your acct, but after a few trading days you were back up to 21%
does this mean the pnl varies a lot?
Quote from jonnysharp:
Yes my account doesn't usually see 20% swings in several days, but as I and others predicted when the turmoil subsided many of my pairs returned to their norm very quickly, I don't think thats a normal event only because of the craziness of the last several weeks. my profit has been growing steadily since then.
Quote from rjiecs:
congrats! this really inspires me..i always like pair trading
i just installed the software u'r using..have some questions:
how do u add a list of stocks? i have to click and search for every single one..
have u tried other exchanges? i tried adding singopre stock exchange but couldn't find any stock..
again thanks for ur help
however I think they said on their forum they are updating the program to import stock lists at once, looking forward to that.
Quote from rjiecs:
does this mean the pnl varies a lot? [/B]
__________________
(BS stands for BuySell!)
Quote from TraderBS:
There is a famous saying about pairs trading - that is has "twice the risk and half of the return".
How long do you hold your positions on average? Do you use any recommendations from pairtrade finder?
Quote from gkishot:
How long do you hold your positions on average? Do you use any recommendations from pairtrade finder?
Do you use a broker who pays you interest on the short side ( or at least does not charge you interest) as yobo suggested at the beginning of the thread?
Quote from TraderBS:
There is a famous saying about pairs trading - that is has "twice the risk and half of the return".
Quote from TraderBS:
There is a famous saying about pairs trading - that is has "twice the risk and half of the return".
Closed 1 trade today;
Sold NWS @ 10.25
Covered IACI @ 16.58
Opened 2 new trades today;
Long AET @ 25.94
Short AGN @ 39.29
Long HUM @ 29.68
Short XRAY @ 30.59
Quote from Rehoboth:
I would hardly call that famous....or correct.
Quote from TraderBS:
OK, maybe I should have used "often said" or something else other than "famous". But I was just pointing it out to the guy that asked about P/L varying a lot.
Also, I would like to point out that I am a fan of this thread and am profitable for pairs trading this year. There was no intention to be negative or critical with the comment.
Quote from rjiecs:
then why would you trade a method that has "twice the risk and half of the return" ?
Opened 1 new trade today;
Long ACI @ 20.94
Short CNX @ 32.81
Closed 1 trade today for a profit;
Sold BIDU @ 234.85
Covered GOOG @ 366.72
Opened 2 new trades;
Long ABX @ 25.43
Short KGC @ 12.84
Long DVA @ 53.03
Short AZN @ 44.38
hey jon
do u follow the exit signals in the software as well or u manage your position in your own way?
Quote from rjiecs:
hey jon
do u follow the exit signals in the software as well or u manage your position in your own way?
Closed my best pair trade today! 6.5pts on one side, 1.5pt on the other side made in 5 days;
Sold HUM @ 36.01
Covered XRAY @ 29.24
Got an exit signal aswell for another trade that id been holding for awhile, closed at a loss;
Sold PHM @ 10.66
Covered TOL @ 20.73
Opened 1 new trade today;
Long GDX @ 23.50
Short GG @ 22.90
Im up 31% since starting this journal 10 weeks ago and have outperformed the SP500 by a massive 65% in the same period with less exposure and portfolio volatility. It has so far exceeded my expectations and some.
Thanks for following my journal everyone, posting here helps me to stay disciplined and to not deviate from my trading plan.
Do you trade fulltime?
Quote from Trend Fader:
Do you trade fulltime?
jonnysharp,
Your latest post with your "most successful pair trade ever" (contrats, by the way) got me curious. In your vast experience, have you ever had a problem taking a trade in a pair that is cross-exchange? (i.e., one stock on the NYSE, the other on NASDAQ) Also, how heavily have you traded pairs with one (or both) being ETF's? (Highly correlated, of course)
Thanks, mousejockey
P.S.: I have been trading off of Pairtrade Finder with my live account for only three weeks, only 100-share lots at a time, no more than one pair on at a time, and still I have already paid for the software three times over!!!!!!!
Your journal is my favorite.
1. But I am wondering, considering that your strategy may actually be successful and not just random noise, do you have any second thoughts about posting so much detail about what you're doing?
If too many people start replicating your actions, it will cut and/or eliminate your profits.
2. Perhaps you just work for pairtrader and want to sell the software
3. Have you considered the special risk of "security known to be involved in pairtrading"? That is, most pair-traded securities are well-known. And there is serious big money involved in them. Some crisis can happen in such a way that forces these giant funds to liquidate. During such a crisis, you could take a very serious hit, perhaps even blow up. I believe that such an event happened not that long ago (2007?), but I don't have the details off the top of my head.
Daniel
Does your program incorporate trade accounting, or do you calculate profit and losses manually? Good job, always interesting to hear other trader's pair trading strategies.
Quote from mousejockey:
jonnysharp,
Your latest post with your "most successful pair trade ever" (contrats, by the way) got me curious. In your vast experience, have you ever had a problem taking a trade in a pair that is cross-exchange? (i.e., one stock on the NYSE, the other on NASDAQ) Also, how heavily have you traded pairs with one (or both) being ETF's? (Highly correlated, of course)
Thanks, mousejockey
P.S.: I have been trading off of Pairtrade Finder with my live account for only three weeks, only 100-share lots at a time, no more than one pair on at a time, and still I have already paid for the software three times over!!!!!!!
Thanks, yes I have had second thoughts about posting my succesful trading strategy on these forums however there are intricacies to my trading plan that I haven't revealed plus successful trading is 90% disclipine & 10% method so Im not worried about others stealing my edge, plus I take the entry signals with discretion. and no I don't work for pairtrader. yes there is systemic risk involved in statisical arbitrage strategies and we recently experienced that in the first week of october with many large funds liquidating and causing wild divergences, it was actually a great time to put on spreads, my open pair trades went askew however once things ''normlized'' they quickly came back and showed good profits. I think it comes down to one's risk management, one stock completely blowing up shouldn't take you out of the game, succesful trading is all about making heaps of small trades with a slight edge.
Quote from dancalio:
Your journal is my favorite.
1. But I am wondering, considering that your strategy may actually be successful and not just random noise, do you have any second thoughts about posting so much detail about what you're doing?
If too many people start replicating your actions, it will cut and/or eliminate your profits.
2. Perhaps you just work for pairtrader and want to sell the software
3. Have you considered the special risk of "security known to be involved in pairtrading"? That is, most pair-traded securities are well-known. And there is serious big money involved in them. Some crisis can happen in such a way that forces these giant funds to liquidate. During such a crisis, you could take a very serious hit, perhaps even blow up. I believe that such an event happened not that long ago (2007?), but I don't have the details off the top of my head.
Daniel
Quote from GGSAE:
Does your program incorporate trade accounting, or do you calculate profit and losses manually? Good job, always interesting to hear other trader's pair trading strategies.
Exited one trade today;
Sold XLNX @ 16.76
Covered ALTR @ 15.54
I was wondering. Say you went short Volkswagen in a pair, and were short when it skyrocketed recently. With a typical account percentage.
What kind of account damage would that have done?
Quote from dancalio:
I was wondering. Say you went short Volkswagen in a pair, and were short when it skyrocketed recently. With a typical account percentage.
What kind of account damage would that have done?
Exited 2 trades;
Sold CE @ 14.42
Covered APD @ 57.82
Sold BAX @ 61.10
Covered GENZ @ 70.83
Are there any good books on pair trading?
One trade on tuesday;
Long COL @ 33.55
Short ITW @ 32.26
Quote from jonnysharp:
One trade on tuesday;
Long COL @ 33.55
Short ITW @ 32.26
Quote from Dean1947:
Are there any good books on pair trading?
yobo, yes my pairs and profits are still holding up and doing well.
Exited one trade today;
Sold ACI @ 16.05
Covered CNX @ 23.15
Opened 1 new trade;
Long HES @ 50.72
Short APC @ 35.16
Jonny,
do you go long and short the equal dollar amount? Or maybe you adjust for beta (or some other adjustments)?
Do you use SSFs for pairtrading?
Do you buy OTM options to hedge pairs (or at least short side)?
Let's say short Volksvagen + long Porsche + OTM calls on Volkswagen (just example, not sure how much they correlated).
HLB
Exited one trade today;
Sold AET @ 23.33
Covered AGN @ 35.66
Exited one trade monday;
Sold DVA @ 51.88
Covered AZN @ 41.55
Opened 1 new trade;
Long BIDU @ 134.09
Short GOOG @ 300.12
Exited one trade today;
Sold ABX @ 21.12
Covered KGC @ 11.13
Entered 3 new trades today;
Long AZN @ 36.84
Short DGX @ 43.94
Long AMT @ 21.58
Short TV @ 13.79
Long BAX @ 53.37
Short GENZ @ 68.00
Quote from HLB:
Jonny,
do you go long and short the equal dollar amount? Or maybe you adjust for beta (or some other adjustments)?
Do you use SSFs for pairtrading?
Do you buy OTM options to hedge pairs (or at least short side)?
Let's say short Volksvagen + long Porsche + OTM calls on Volkswagen (just example, not sure how much they correlated).
HLB
hey jon
how do u set up the IQ Feed connection?
also your version is quite different from mine...
Hey johhny how's your overall profitability? A lot of pair traders are getting whacked as many spreads are at retarded stretches.
Quote from rjiecs:
hey jon
how do u set up the IQ Feed connection?
also your version is quite different from mine...
Quote from GGSAE:
Hey johhny how's your overall profitability? A lot of pair traders are getting whacked as many spreads are at retarded stretches.
Time to profitability
Hello Jonny
I noticed that all the trades that you took on 11/19/08 are in the red as of the close on 11/21/08.
On average, how long does it take for your winning trades to be permanently in the green?
When do you decide that a trade is not viable anymore and you close it?
Thanks
Gabe
Quote from jonnysharp:
Overall profitability is great, im still up over 30% since starting this journal. I know there is some dislocation occuring out there, however ive managed to put on some good trades, plus when things normalize thats when pairs quickly return to their mean.
Re: Time to profitability
Quote from Gabe2004:
Hello Jonny
I noticed that all the trades that you took on 11/19/08 are in the red as of the close on 11/21/08.
On average, how long does it take for your winning trades to be permanently in the green?
When do you decide that a trade is not viable anymore and you close it?
Thanks
Gabe
Quote from GGSAE:
Good stuff. Many spreads have been getting blown out but there's been lots of trading opportunities out there to offset potential damange....I just want to introduce a new element to pairs you probably haven't looked at, dividends.
Quote from jonnysharp:
yes agree,
would you care to expand on dividend pair trading? thanks.
Closed one trade tuesday;
Sold GDX @ 25.69
Covered GG @ 24.74
Closed 2 trades today;
Sold AMT @ 27.18
Covered TV @ 15
Sold BAX @ 53.27
Covered GENZ @ 64.71
Quote from jonnysharp:
Closed one trade tuesday;
Sold GDX @ 25.69
Covered GG @ 24.74
Closed 2 trades today;
Sold AMT @ 27.18
Covered TV @ 15
Sold BAX @ 53.27
Covered GENZ @ 64.71
pair trader recommended trades
i I find their newletter hilarious
last week DAL/NWA was recommended
How do you trade a bankrupt airline?
today
PMU/NWA
They are advising to pair PMU a .09 cent stock
I bought the software a week ago and still looking for the edge
cheers john
Re: pair trader recommended trades
I don't subscribe to their newsletter, I find my own trades so I can't comment on that, I can say that im up 44% since starting this journal using the entry & exit signals from the program, so its working for me.
Quote from GGSAE:
I can't expand on much of it, there are pair traders that have devised a trading edge and methodology strickly around dividends. I just try to put myself in a position to make sure i collect more than I pay which is a nice added bonus to my overall profitability.
One of the pairs i trade is a slower pair with a tight longer-term range. Aside from fundamentals there's also a nice dividend edge, so i'll look to put a trade close to the ex div date according to my plan as I know i can take it off for a minimum scratch trade and collect the dividend in the process. Because i hold positions for the long-term i also have a chunk of capital that i'm sitting in which i've also used for collecting dividends. In this particular pair i have a plus 9K dividend collection this year, a significant amount of the profitability. So it's something you really want to be cognizant of, especially paying out dividends.
Quote from Trend Fader:
How did you come up with the pair AMT TV? They are highly correlated but not in the same industry group via yahoo or other data services.
Quote from GGSAE:
I can't expand on much of it, there are pair traders that have devised a trading edge and methodology strickly around dividends. I just try to put myself in a position to make sure i collect more than I pay which is a nice added bonus to my overall profitability.
One of the pairs i trade is a slower pair with a tight longer-term range. Aside from fundamentals there's also a nice dividend edge, so i'll look to put a trade close to the ex div date according to my plan as I know i can take it off for a minimum scratch trade and collect the dividend in the process. Because i hold positions for the long-term i also have a chunk of capital that i'm sitting in which i've also used for collecting dividends. In this particular pair i have a plus 9K dividend collection this year, a significant amount of the profitability. So it's something you really want to be cognizant of, especially paying out dividends.
Closed one trade today;
Sold COL @ 31.78
Covered ITW @ 30.84
Opened 1 new trade;
Long STM @ 6.10
Short MXIM @ 11.81
Ive been away for the last week so time to update the journal
Closed 3 trades since last posting;
Sold APA @ 65.50
Covered EOG @ 68.79
Sold AZN @ 37.34
Covered DGX @ 43.57
Sold STM @ 6.28
Covered MXIM @ 11.03
Opened 2 new trades Friday;
Long APA @ 62.61
Short OXY @ 46.19
Long AGU @ 24.45
Short CF @ 47.05
Exited one trade today;
Sold AGU @ 30.59
Covered CF @ 52.30
% P&L
Hello Jonny
If it is not too much trouble, could you add the % P&L on the trade and the Annual % P&L. (not the $ amount that you made).
I wish you continued success.
Gabe
Jonny,
Thanks for taking the time to maintain this thread.
I see that you gave PairTrade Finder a good review in the ET products and services section.
Here is my question.
Let's take a spread like XOM/CVX , where the 3 year correlation and the 1 year correlation are both high (3 yr: .96 / 1yr: .86 - based on spdrindex.com correlations ) and they are obviously in the same business with comparable macro issues.
When PairTrade Finder does a backtest - how profitable is this pair?
Now, let's compare it to GE/PFE, where the 3 year correlation is decent (.75) and the 1 year correlation is (.89). They are not, however, in the same business.
When PairTrade Finder does its backtest - how profitable is this pair?
Just interested in seeing if the buy/sell signal methodology is clever enough to exploit a relatively high correlation for short term trades regardless of longer-term macro exposures.
Hey jonny, I did a little research on my own about pairs trading and ended up finding a bunch of references to "cointegration". Earlier in this thread someone else brought this up as well.
Do you use cointegration for choosing pairs, or something else (i.e. correlation)?
Quote from trump-baja:
Let's take a spread like XOM/CVX , where the 3 year correlation and the 1 year correlation are both high (3 yr: .96 / 1yr: .86 - based on spdrindex.com correlations ) and they are obviously in the same business with comparable macro issues.
When PairTrade Finder does a backtest - how profitable is this pair?
Now, let's compare it to GE/PFE, where the 3 year correlation is decent (.75) and the 1 year correlation is (.89). They are not, however, in the same business.
When PairTrade Finder does its backtest - how profitable is this pair?
Just interested in seeing if the buy/sell signal methodology is clever enough to exploit a relatively high correlation for short term trades regardless of longer-term macro exposures.
Quote from stevegee58:
Hey jonny, I did a little research on my own about pairs trading and ended up finding a bunch of references to "cointegration". Earlier in this thread someone else brought this up as well.
Do you use cointegration for choosing pairs, or something else (i.e. correlation)?
Quote from jonnysharp:
Strangely enough over the last year GE/PFE has made more than XOM/CVX, although I don't trade either pair.
Exited one trade today;
Sold BIDU @ 132.15
Covered GOOG @ 324.78
Quote from jonnysharp:
Exited one trade today;
Sold BIDU @ 132.15
Covered GOOG @ 324.78
just found this thread today and found it a great read. i'm also interested in this style of trading and will probably be adopting it come jan 1st for my own OCD'ness. one question i have is what version of the program you would advise getting~ is the cheapest one viable for all, or are some of the later capabilities really important that the more expensive versions offer. i doubt i'll be automating the trades i'd prefer to do them myself at least for a while. thanks,
dm
had to post to get my thread subscription~
Quote from dumb_mother:
just found this thread today and found it a great read. i'm also interested in this style of trading and will probably be adopting it come jan 1st for my own OCD'ness. one question i have is what version of the program you would advise getting~ is the cheapest one viable for all, or are some of the later capabilities really important that the more expensive versions offer. i doubt i'll be automating the trades i'd prefer to do them myself at least for a while. thanks,
dm
had to post to get my thread subscription~
Opened 1 new trade;
Long JWN @ 12.75
Short ANF @ 22.84
1 new trade today;
Long DRQ @ 17.60
Short OII @ 27.41
Closed 1 trade;
Sold APA @ 71.99
Covered OXY @ 53.45
Do you allow odd lot quantities in your orders, or do you always round to the nearest hundred shares?
Trade from Dec-26-08
Hello
When did you enter the trade that you closed on Dec-26-08?
I could not find it anywhere in your posts.
Happy New Year
Gabe
Quote from george_s:
Do you allow odd lot quantities in your orders, or do you always round to the nearest hundred shares?
Re: Trade from Dec-26-08
Quote from Gabe2004:
Hello
When did you enter the trade that you closed on Dec-26-08?
I could not find it anywhere in your posts.
Happy New Year
Gabe
Opened 1 trade;
Long SUP @ 9.26
Short GNTX @ 8.32
Quote from jonnysharp:
Opened 1 trade;
Long SUP @ 9.26
Short GNTX @ 8.32
Quote from Trend Fader:
SUP- has a $240mil market cap?
Re: Re: Trade from Dec-26-08
Quote from jonnysharp:
If you are referring to APA/OXY its here http://www.elitetrader.com/vb/showt...6&pagenumber=61
Quote from jonnysharp:
Closed 1 trade;
Sold APA @ 71.99
Covered OXY @ 53.45
Exited 2 trades on Friday;
Sold JWN @ 14.55
Covered ANF @ 24.36
Sold DRQ @ 22.03
Covered OII @ 30.34
Opened 1 trade;
Long MGG @ 14.70
Short TPP @ 21.32
I hope you fellas are making
money with all this journal talk.
If you dont have this pair in your inventory, check it out. CFR and PRSP - both are strong high quality texas regional banks. On a simple term - when one moves 4 to 6 percent on the other, go against it. You can run all the other data and testing you want on it to get at a more statistical signal, but the end result will be a signal triggered about the same time.
The only real divergence was in 2/08 due to an adjustment related to earnings.
Both have great asset quality, but if one erodes relative to the other after earnings (npa/ta), be careful to see if the correleation fades. If not, its easy money over and over.
Another great pair is knx/htld. To short-to-medium haul trucking stocks. Triggers seems to manifest near the dollars, but id wait for 6 to 10 percent moves to fade or begin ranging into it slowly.
Johnny,
Can you go into some detail about the MGG pair? I have been eyeing this stock as a stand alone long but upstream MLP's make me nervous....thanks!
Quote from Gabe2004:
-0.4% absolute loss.
-5% annual rate
__________________
Profits are a byproduct of proper risk management.
Hello
These are my calcualtions of the performance of Jonnysharp.
I just entered all the trades and when a trade closes, I calculate the return based on an absolute value and based on the time spent in the trade.
Quote from jonnysharp:
Exited 2 trades on Friday;
Sold JWN @ 14.55
Covered ANF @ 24.36
Sold DRQ @ 22.03
Covered OII @ 30.34
Opened 1 trade;
Long MGG @ 14.70
Short TPP @ 21.32
Quote from LVtrader35:
Johnny,
Can you go into some detail about the MGG pair? I have been eyeing this stock as a stand alone long but upstream MLP's make me nervous....thanks!
Re: I hope you fellas are making
Quote from PIZZAPIZZA:
money with all this journal talk.
If you dont have this pair in your inventory, check it out. CFR and PRSP - both are strong high quality texas regional banks. On a simple term - when one moves 4 to 6 percent on the other, go against it. You can run all the other data and testing you want on it to get at a more statistical signal, but the end result will be a signal triggered about the same time.
The only real divergence was in 2/08 due to an adjustment related to earnings.
Both have great asset quality, but if one erodes relative to the other after earnings (npa/ta), be careful to see if the correleation fades. If not, its easy money over and over.
Another great pair is knx/htld. To short-to-medium haul trucking stocks. Triggers seems to manifest near the dollars, but id wait for 6 to 10 percent moves to fade or begin ranging into it slowly.
Alright Ive had my holidays, time to get stuck back into trading, Ive revamped my watchlists and added a few more pairs, Ive got my watchlists split into industries now instead of sectors. Busy day today opened 4 new trades;
Long SE @ 16.85
Short EP @ 8.81
Long GES @ 16.08
Short JWN @ 15.20
Long MT @ 25.75
Short SID @ 15.14
Long SIM @ 5.18
Short GNA @ 7.00
Quote from jonnysharp:
Alright Ive had my holidays, time to get stuck back into trading, Ive revamped my watchlists and added a few more pairs, Ive got my watchlists split into industries now instead of sectors. Busy day today opened 4 new trades;
Long SE @ 16.85
Short EP @ 8.81
Long GES @ 16.08
Short JWN @ 15.20
Long MT @ 25.75
Short SID @ 15.14
Long SIM @ 5.18
Short GNA @ 7.00
Quote from Trend Fader:
SIM- trades less than 100k shares per day. Is that of concern?
fundamental comparison
hi jonny
i repeat great journal and success in 09
I see you have a comparison chart on your page.It looks like a great aid. Would that be available to me a none beta subscriber?
cheers
john
Hi,
Sorry if this is not the topic being discussed, but I often hear about the opening pair gap play.
This works well on paper as if the spread increases a whole bunch to play to mean revert it. But how exactly is this executed.
Stocks don't open all @ the same time, and if they do open I have to imagine the slippage of putting them both on are huge.
Could you accomplish this by sending OPG orders? But what if they post aren't filled?
I'm confused.
Quote from Sky123987:
Hi,
Sorry if this is not the topic being discussed, but I often hear about the opening pair gap play.
This works well on paper as if the spread increases a whole bunch to play to mean revert it. But how exactly is this executed.
Stocks don't open all @ the same time, and if they do open I have to imagine the slippage of putting them both on are huge.
Could you accomplish this by sending OPG orders? But what if they post aren't filled?
I'm confused.
Exited one trade for nice profits;
Sold SUP @ 11.74
Covered GNTX @ 9.10
Opened 2 new trades;
Long ETP @ 36.77
Short PAA @ 38.98
Long ALV @ 22.76
Short MGA @ 35.73
Johnny, on the ETP/PAA pair how to you evaluate a short/long that pays a hefty dividend vs the other please?
Thanks
Quote from LVtrader35:
Johnny, on the ETP/PAA pair how to you evaluate a short/long that pays a hefty dividend vs the other please?
Thanks
Johnny - excellent thread, great trading. All the best for 2009.
I have questions regarding trade management.
You have mentioned that you do not apply your own stoploss on the spread, just wait for the program's exit signal (which I presume would have a built in stoploss). Also I understand that most trades initially lose, until they turn around to spread convergence.
- What have you seen (typically and worst case) as drawdown for losing and winning trades (in % or standard deviations) ?
- Any "mental" stoploss, or do you solely rely on program exits?
- Are you concerned at all about sudden expansion of spreads?
- Do you feel these trades need a constant "babysitting" for exit alerts? (... I think you mentioned a preference not to trade the whole day).
Quote from saratur:
Johnny - excellent thread, great trading. All the best for 2009.
I have questions regarding trade management.
You have mentioned that you do not apply your own stoploss on the spread, just wait for the program's exit signal (which I presume would have a built in stoploss). Also I understand that most trades initially lose, until they turn around to spread convergence.
- What have you seen (typically and worst case) as drawdown for losing and winning trades (in % or standard deviations) ?
- Any "mental" stoploss, or do you solely rely on program exits?
- Are you concerned at all about sudden expansion of spreads?
- Do you feel these trades need a constant "babysitting" for exit alerts? (... I think you mentioned a preference not to trade the whole day).
Quote from jonnysharp:
Exited one trade for nice profits;
Sold SUP @ 11.74
Covered GNTX @ 9.10
Quote from jonnysharp:
I don't play pairs via OPG, I mostly use MOC orders to get filled. Id imagine it would be difficult to pair trade this way as you would need to use MOO orders and have a prior opening price indication and like you say stocks have staged opening so your other side could move dramatically after been filled on one side. I find entering just before the close or on the close to be the most effective way to get filled.
I hope no-one was long Satyam (SAY) in any of their pairs trades
An interesting pair would have been long Madoff short Satyam
Basically a breakeven wash.
Quote from Sky123987:
thanks for the response. You use MOC orders? Doesn't it happen that say the price at which you get filled on the MOC print is often not wha tyou want as you have to enter these suckers before 3:40 est?
jonny,
I have been using pair trade finder for a few months now and was wondering if you use any filter once a buy signal is reached , since I seem to get a lot of them. Any help and advice would be great
Quote from hat8866:
jonny,
I have been using pair trade finder for a few months now and was wondering if you use any filter once a buy signal is reached , since I seem to get a lot of them. Any help and advice would be great
One new trade;
Long ANV @ 3.92
Short GRS @ 5.04
Jonny,
thanks for the help. I was doing most of the same things. One other thing I added to help reduce the amounts of buy signals was to increase my strech and I added a second layer to really show ones that have gotten a bit out of whack
2 new trades;
Long BAS @ 10.80
Short HAL @ 17.93
Long ETE @ 17.47
Short MGG @ 16.16
Quote from hat8866:
Jonny,
thanks for the help. I was doing most of the same things. One other thing I added to help reduce the amounts of buy signals was to increase my strech and I added a second layer to really show ones that have gotten a bit out of whack
One new trade;
Long TEN @ 2.41
Short TKS @ 7.76
Exited one trade for nice profits;
Sold GES @ 15.12
Covered JWN @ 12.04
Quote from jonnysharp:
Exited one trade for nice profits;
Sold GES @ 15.12
Covered JWN @ 12.04
Exited one trade for nice profits;
Sold ANV @ 4.25
Covered GRS @ 4.59
Opened 1 new trade;
Long SII @ 23.23
Short DRQ @ 21.96
Quote from jonnysharp:
Exited one trade for nice profits;
Sold ANV @ 4.25
Covered GRS @ 4.59
Historical track
Hello,
Do you have by any chance an historical track for all your trades?
Can you present them?
I'm interested to see your total performance since you started trading.
Thanks.
pair trading - ration charts
Quote from jonnysharp:
Yes I filter through multiple entry signals everyday and am very picky in the one's that I choose, basically I have my pairs watchlist split into different industries, then only look at pairs above 90% correlation, I like to see an correlation in an uptrend, but mostly I'm eyeballing the ratio chart, I want it to be a wide trading range, I don't take entry signals on pairs that have strongly trending ratio charts, I also look at a volatility, spread & fundamentals for anything at extreme readings, but mostly looking at the ratio chart.
Re: Historical track
Quote from tal_shir:
Hello,
Do you have by any chance an historical track for all your trades?
Can you present them?
I'm interested to see your total performance since you started trading.
Thanks.
One new trade friday;
Long GFI @ 8.23
Short AU @ 25.96
Re: pair trading - ration charts
Quote from Goalgetter:
-----------------------
Jonny
Sorry I probably did get the point:
what has the ration chart to look like??
Thanks
GG
Re: Re: Historical track
Quote from jonnysharp:
Yeah sure, here is a spreadsheet with all my trades exactly as entered in this journal. Profit/loss is based on $10,000 invested in each trade. As you can see the majority of my profits have been made on the short side and my performance has improved since starting this journal.
Gabe - a key advantage of pair trading is the possibility to trade profitably while consistently being market neutral (in $ amount or volatility). The idea is that your profitablility will not be influenced by the overall market.
If you have a good system to determine future market direction, and this system works - you could make money with significantly less effort using other forms of trading.
thanks gabe for your analysis and inputs, yes market direction does affect which side makes most of the profits naturally, its funny because ive been bearish for a long time now and it did cross my mind when I started this journal to weigh by shorts 120% to that of my longs, but decided against it because I don't want to get burnt on the technical rallies or dead cat bounces, so I decided to keep it simple, of course in hindsight everything is clear and I would have made a lot more, however like saratur said the main idea is stay market neutral and make $$$ regardless of market direction espically in this environment directional trading is very difficult.
Johnnysharp, thank you for the steady journal and sharing your results.
Looking at the spreadsheet: Average profit of 1.46% per trade, 2.19 profit factor. Pretty nice.
What was the average trade time? (.. I could probaby dig dates out of the posts, but it would be pretty tedious :-) ).
>> "…. and my performance has improved since starting this journal."
The second half is remarkedly better than the first. What are the key factors you would attribute this to? Is it "eyeballing the chart" for pair selection as you described? rising correlation? signal settings in Pairtradefinder? other?
saratur
Quote from saratur:
Johnnysharp, thank you for the steady journal and sharing your results.
Looking at the spreadsheet: Average profit of 1.46% per trade, 2.19 profit factor. Pretty nice.
What was the average trade time? (.. I could probaby dig dates out of the posts, but it would be pretty tedious :-) ).
>> "…. and my performance has improved since starting this journal."
The second half is remarkedly better than the first. What are the key factors you would attribute this to? Is it "eyeballing the chart" for pair selection as you described? rising correlation? signal settings in Pairtradefinder? other?
saratur
List of pair selection criteria
I've read all of the posts (there are a ton, it's a popular thread). Jonny your success has increased, and the size of your losses has decreased. What has changed the size of your early losses?
Through the posts many people have shared and refined some of their pairs selection criteria. I've made note of many of them, but it sure would be nice if we could see your current lists of selection criteria.
Everyone has a different set and it would be good to see those fully detailed in individual posts.
I thought I had at least a beginners understanding of how to make the selections, but after loading Pair Trader Finder, finding and saving pairs, there are so many that it's almost overwhelming.
Thanks for all of your sharing.
Walt B
Profit history
So what does profit history have to do with pair selection? In Pair Trade Finder, the Matchmaker table shows the total profit of all the trades taken in the last year for a particular pair, and the average profit. Some pairs with high correlation and with many trades recommended by the Finder lost a lot of money, and some with lower correlation and also many trades made good money. Shouldn't profit history also be a criteria in selectiing pairs? If so, shouldn't the software have that field as part of the Watch Item (Pair Analysis) page?
Re: List of pair selection criteria
Quote from waltbx:
I've read all of the posts (there are a ton, it's a popular thread). Jonny your success has increased, and the size of your losses has decreased. What has changed the size of your early losses?
Through the posts many people have shared and refined some of their pairs selection criteria. I've made note of many of them, but it sure would be nice if we could see your current lists of selection criteria.
Everyone has a different set and it would be good to see those fully detailed in individual posts.
I thought I had at least a beginners understanding of how to make the selections, but after loading Pair Trader Finder, finding and saving pairs, there are so many that it's almost overwhelming.
Thanks for all of your sharing.
Walt B
Quote from waltbx:
So what does profit history have to do with pair selection? In Pair Trade Finder, the Matchmaker table shows the total profit of all the trades taken in the last year for a particular pair, and the average profit. Some pairs with high correlation and with many trades recommended by the Finder lost a lot of money, and some with lower correlation and also many trades made good money. Shouldn't profit history also be a criteria in selectiing pairs? If so, shouldn't the software have that field as part of the Watch Item (Pair Analysis) page?
Re: Re: List of pair selection criteria
Quote from jonnysharp:
.... and the ratio chart has got to look like its in a trading range or overextended,
...
DOW/Nasdaq
A couple of days ago there was a divergence between the Dow and Nasdaq. Dow up and Nasdaq down. Wouldn't that be a good pair opportunity?
What symbols would one choose? Nasdaq is the Q's, what would be the Dow.
WB
Re: DOW/Nasdaq
Quote from waltbx:
A couple of days ago there was a divergence between the Dow and Nasdaq. Dow up and Nasdaq down. Wouldn't that be a good pair opportunity?
What symbols would one choose? Nasdaq is the Q's, what would be the Dow.
WB
Quote from jonnysharp:
Thankyou, yes I think its a combination of a few things, picking trades better based off eyeballing the ratio chart, choosing pairs with higher and increasing correlation, the release of pairtrade finder version 2 made it easier to find better trades and also I think when I started this journal the market was very tumultuous and spreads were getting hammered, especially in early October, however turned out to be a good time to enter trades with VIX > 70, I remember one week when prices & volatility stablised my pairs snapped back with ferocity into profits. Staying the course is the name of the game.
Re: Re: Re: List of pair selection criteria
Quote from saratur:
Johnnysharp, could you please clarify what exactly you mean by "overextended"?
Do you mean new high/low or something else?
My gut feeling is that if I see a chart where the spread is now beyond its levels in the past few months (in other words, a new high or low) it would be a risky trade. But I do not have the statistics/experience to back this up... it might be the other way round. What is your experience?
Re: DOW/Nasdaq
Quote from waltbx:
A couple of days ago there was a divergence between the Dow and Nasdaq. Dow up and Nasdaq down. Wouldn't that be a good pair opportunity?
What symbols would one choose? Nasdaq is the Q's, what would be the Dow.
WB
Quote from jones247:
I'm considering giving Pairtrade Finder a try. Do you think it's worth the investment?
thanks,
Walt
thanks...
great journal. i really wish there was a way to incorporate this software intraday. do you know if they are working on such a version?
Quote from boostin1004:
great journal. i really wish there was a way to incorporate this software intraday. do you know if they are working on such a version?
Quote from boostin1004:
great journal. i really wish there was a way to incorporate this software intraday. do you know if they are working on such a version?
yobo, how far do you let trades that go against you run? what do you do as a stoploss?
A stoploss on spread, e.g. a fixed number of standard deviations? A fixed percentage of P/L ? Something else?
Jonny, I'm looking at your trade Jan 9, ANV/GRS. It netted you a nice profit, yet I would not have taken the trade. So I want to know what I'm not seeing that you saw. I see Ratio and RSI not diverging as I think they should, I see the correlation droping from 95 to 85 on the near term. I don't see this as a profitable trade. Where am I wrong? What told you to take it?
Thanks, Jonny.
wb
Quote from waltbx:
Jonny, I'm looking at your trade Jan 9, ANV/GRS. It netted you a nice profit, yet I would not have taken the trade. So I want to know what I'm not seeing that you saw. I see Ratio and RSI not diverging as I think they should, I see the correlation droping from 95 to 85 on the near term. I don't see this as a profitable trade. Where am I wrong? What told you to take it?
Thanks, Jonny.
wb
Quote from saratur:
yobo, how far do you let trades that go against you run? what do you do as a stoploss?
A stoploss on spread, e.g. a fixed number of standard deviations? A fixed percentage of P/L ? Something else?
Standard Deviation
You guys talk a lot about SD and I understand what Standard Deviation is, but I cannot see how to get PT to show SD on the charts.
How are you all figuring SD?
Walt B
Re: Standard Deviation
Quote from waltbx:
You guys talk a lot about SD and I understand what Standard Deviation is, but I cannot see how to get PT to show SD on the charts.
How are you all figuring SD?
Walt B
Thanks
Thanks for answering my questions. I appreciate it.
Walt B
One new trade;
Long ANV @ 3.77
Short GRS @ 5.55
Re: Re: Standard Deviation
Quote from jonnysharp:
SD doesn't show on the charts and you don't need it too. In your preferences for signal settings and in layers, the number used for pair stretch is the same as standard deviation, so if your pair stretch is 2.00 and your 2nd layer is pair stretch 2.30, you will receive an entry signal when the pair deviates 2 stdevs and another signal at 2.3 stdevs.
I got a Layer 1 and 2 signal on TGP/TOO (Spread dropping) Good trade?
Your trade today ANV/GRS the spread is increasing. How does that factor in? I would think an increasing spread is favorable.
wb
Jonny,
Question for you. I have pair trader finder and V/MA came up as a trade, did you take this? If not, why not? I am just trying to pinpoint when I get in and when I dont.
Quote from waltbx:
I got a Layer 1 and 2 signal on TGP/TOO (Spread dropping) Good trade?
Your trade today ANV/GRS the spread is increasing. How does that factor in? I would think an increasing spread is favorable.
wb
Quote from hucriel1615:
Jonny,
Question for you. I have pair trader finder and V/MA came up as a trade, did you take this? If not, why not? I am just trying to pinpoint when I get in and when I dont.
Quote from bwolinsky:
So I guess no one told you there's no significance between a stock priced at $100 divided by a stock priced at $1. It's a waste to just look at the ratio.
The twenty or so steps beyond that chart are what makes the big money, and distinguishes between an amateur and the quant.
__________________
Scott Lepore
Has anyone on this thread done opening only strategies. If so, how would you compare that strategy to pairs trading as far as consistency, risk, difficulty, etc. Obviously to each his own but just curious for some input. Don Bright starts his student with Open Only orders but pairs trading appears lest risky to me?
__________________
Scott Lepore
Re: Re: Historical track
Quote from jonnysharp:
Yeah sure, here is a spreadsheet with all my trades exactly as entered in this journal. Profit/loss is based on $10,000 invested in each trade. As you can see the majority of my profits have been made on the short side and my performance has improved since starting this journal.
__________________
Scott Lepore
Exited one trade for profits;
Sold GFI @ 9.67
Covered AU @ 27.69
Re: Re: Re: Historical track
Quote from slepore:
Jonnysharp,
Thanks for staring this thread and posting your excel sheet of trades. Great to see you are improving so much. Have you increased your share size as you improve?
Quote from jonnysharp:
10-27-08 11:12 PM
--------------------------------------------------------------------------------
Quote from ScreenLocal:
Hi Jonnysharp,
Is there a way you can calculate the potential profit if the bidu/goog ratio goes from 0.55 to 0.65?
--------------------------------------------------------------------------------
Yes you could calulate the potential profit on that trade, in your example if the ratio went from 0.55 to 0.65 that would be an 18.18% increase in the ratio, so take the $$$ committed to one side and multiply by 0.1818 and that would be the profit.
Quote from waltbx:
I wish it were this simple, and unless I'm misunderstanding something here, this won't work. It is an increase of 18.18% in the ratio, but the profit won't fall out by multiplying that by one side of the leg.
Am I missing something?
WB
Quote from jonnysharp:
Let me give you an example;
Long $10k ABC @ 100
Short $10k XYZ @ 181
Ratio = 0.55
Sold ABC @ 118
Covered XYZ @ 181
Ratio = 0.65
Profit on ABC = 18% ($1800)
Profit on XYZ = 0% ($0)
0.65 / 0.55 = 1.1818
Quote from Gabe2004:
Hello Johnnysharp
You are showing a profir of 18% but I think it is 9% because you need to calculate the profir on the TOTAL exposure that you have (both legs of the trade) since margin requirements for a PAIR TRADE are taken to be the 2 legs as independent trades.
One new trade;
Long SFL @ 11.68
Short VLCCF @ 15.13
Exited two trades;
Sold MT @ 26.48
Covered SID @ 16.43
Sold ETE @ 18.80
Covered MGG @ 16.02
Entered two new trades;
Long TMK @ 34.80
Short MET @ 33.27
Long SPN @ 16.59
Short NOV @ 28.95
Hi jonnysharp,
I really appreciate your thread. thanks for your continued contributions.
btw... what's your return on capital since last August (either the 5 or so months or annualized)?
thanks,
Walt
Quote from jones247:
Hi jonnysharp,
I really appreciate your thread. thanks for your continued contributions.
btw... what's your return on capital since last August (either the 5 or so months or annualized)?
thanks,
Walt
Jonnysharp,
How are you managing the ANV/GRS trade since GRS took off? Do you have an uncle point or just stay in now that it is even more out of whack and you are well diversified anyway. I noticed GRS has had positive news in the last few weeks with positive earnings and an upgrade. Do you even take that into account, even though it is after the fact? Seems like it made a difference although in a delayed way.
Also, you mentioned you trade equal dollar amounts. Does that mean you trade stocks with equal beta's or do you not use beta?
Thanks,
Scott
__________________
Scott Lepore
Quote from slepore:
Jonnysharp,
How are you managing the ANV/GRS trade since GRS took off? Do you have an uncle point or just stay in now that it is even more out of whack and you are well diversified anyway. I noticed GRS has had positive news in the last few weeks with positive earnings and an upgrade. Do you even take that into account, even though it is after the fact? Seems like it made a difference although in a delayed way.
Also, you mentioned you trade equal dollar amounts. Does that mean you trade stocks with equal beta's or do you not use beta?
Thanks,
Scott
Quote from jonnysharp:
no managing at all just waiting for an exit signal, don't really care how long it takes to come back, im mainly focused on finding new trades, and don't even look at my open positions until I get an exit signal, and no on this one I didn't take the fundamentals into account, just a pure technical play, there was a 2nd layer signal on the 26th that would have significantly lowered my cost average but I choose not to play. Yes dollar neutral as in buy 10k worth of stock and short sell 10k worth of stock, simply put 10,000 / share price = shares to buy/sell
__________________
Scott Lepore
Quote from jonnysharp:
ROI = 64% since start of journal
Annualized = 153%
SP500 Outperformance = 102% since start of journal
Also with less risk, exposure and volatility of SP500.
Quote from jonnysharp:
no managing at all just waiting for an exit signal, don't really care how long it takes to come back, im mainly focused on finding new trades, and don't even look at my open positions until I get an exit signal, and no on this one I didn't take the fundamentals into account, just a pure technical play, there was a 2nd layer signal on the 26th that would have significantly lowered my cost average but I choose not to play. Yes dollar neutral as in buy 10k worth of stock and short sell 10k worth of stock, simply put 10,000 / share price = shares to buy/sell
Quote from jones247:
That's pretty amazing... kudos to you!!!
Btw, I assume that thoses results excludes the drawdown on open positions. In other words, the roi is on closed positions only. If you were to include the current drawdown from the open positions, would your returns be as strong?
thanks,
Walt
not 102%.
those aren't my calculations; however, I believe that Jonnysharp stated that he has outperformed the S&P 500 by 102% since August of last year (the start of his journal).
Walt
Johannysharp wrote:
ROI = 64% since start of journal
Annualized = 153%
SP500 Outperformance = 102% since start of journal
>>>
Johnnysharp - Hats off! And thanks for sharing.
Please clarify: This 64% ROI, at what level of maximum margin (e.g. typical 1:2, or 1:4 portfolio margin) ? Or is it calculated based on the un-leveraged capital (in which case the hat just went to the stratosphere )
Quote from jones247:
That's pretty amazing... kudos to you!!!
Btw, I assume that thoses results excludes the drawdown on open positions. In other words, the roi is on closed positions only. If you were to include the current drawdown from the open positions, would your returns be as strong?
thanks,
Walt
Quote from jones247:
I guess that your exit signal comes from "Pairtrade Finder"?
thanks,
Walter
Quote from Gabe2004:
How did you calculate the return on the S&P?
If we take the close on Nov 20/2008 ~ 752 and the close today ~ 845 - about 14% increase in 69 days.
That will give an anual increase of 65%
And let's not forget that we are down almost 38% for the past 52 weeks.
But I would settle for your 64% return so far
Quote from saratur:
Johannysharp wrote:
ROI = 64% since start of journal
Annualized = 153%
SP500 Outperformance = 102% since start of journal
>>>
Johnnysharp - Hats off! And thanks for sharing.
Please clarify: This 64% ROI, at what level of maximum margin (e.g. typical 1:2, or 1:4 portfolio margin) ? Or is it calculated based on the un-leveraged capital (in which case the hat just went to the stratosphere
Exited 3 trades;
Sold SIM @ 4.41
Covered GNA @ 6.02
Sold ALV @ 19.13
Covered MGA @ 29.20
Sold TEN @ 1.98
Covered TKS @ 6.90
1 new trade;
Long KIM @ 15.43
Short WRI @ 17.30
Couple of Questions
Hi Johnny,
I made my way through your entire thread from the beginning. Very Interesting!
I saw you had stocks broken down by major industry, but now towards the end it looks like things are even more isolated, maybe by sector?
Also, how much money from your experience would someone have to commit to each side of a pair to realize an average gain?
Thanks and keep the journal going. It's a great read.
Quote from jonnysharp:
thankyou, yes max margin is 1:10, results achieved using leverage.
Quote from saratur:
Johnnysharp, would you mind to clarify how would the ROI look like without leverage, or say what was roughly the average & max leverage you used? ... I presume 1:10 is a typo; I am just trying to get an idea of what can one aim for. Pairs trading lends itself to portfolio-margin accounts; and based on the non-leveraged return things may look quite different with a typical Reg T margin account then with a portfolio margin account.
Re: Couple of Questions
Quote from LazyLightnin:
Hi Johnny,
I made my way through your entire thread from the beginning. Very Interesting!
I saw you had stocks broken down by major industry, but now towards the end it looks like things are even more isolated, maybe by sector?
Also, how much money from your experience would someone have to commit to each side of a pair to realize an average gain?
Thanks and keep the journal going. It's a great read.
Hi Johnny,
I guess I'm asking how loose or tight you have your groupings. Do you separate stocks into 5-10-20 groups? I mean something like basic materials has a bunch of sectors. Do you lump them all into one group or subdivide them? It seems that general category is too broad, and even though they may correlate well what happens if one sector is downgraded, etc.?
(Edit: I misread what you said. OK, you have them categorized by broad industry now, but I'm assuming you check the sectors when you find a pair you like to make sure they aren't in completely different businesses)
And yes, my other question was in regards to commission problems. I would only be able to trade like 2.5G a side in order to produce enough pairs to mitigate the exposure risk.
Thanks.
Yes I only have pairs grouped by industry, so no need to check their business profiles.
Yes 2.5k per side will be ok, if your paying $2 round trip, and avg profit per trade is 1.5% then your commission will be about 2.6% of your profits which is fine.
Exited 2 trades;
Sold ETP @ 34.93
Covered PAA @ 37.80
Sold ANV @ 5
Covered GRS @ 6.55
Opened new trade;
Long ZEUS @ 15.87
Short SIM @ 4.60
Hi John,
First of all, let me thank you, for all the shared information.
I have read about pairstrading sometime ago, but on that time, i found it unsuitable for individual investors.
Now, with pairtradingfinder, i am changing my mind, but still afraid of the strategy effectiveness, when the market conditions shift for a clear trending line with low volatility.
Anyway, i am doing paper trading, based on ptf signals and some homemade filtering (if you have spare time, take a look on: Short CIEN long GLW).
Regarding the signals generated by ptf, i understand a entry signal is generated when ratio deviates 2STD. Do you know if this is the only data considered? RSI and volatility is also taken in consideration?
What about the exit signals. Do you have any idea how are they calculated?
Best Regards
Number Of Stocks
Hi Johnny,
I downloaded pairtradefinder and went through their list of industries and back tested them. There are just too many stocks, even ones that correlate well.
Do you have any advice on a cutoff for correlation, like 90%+, 95%+, etc., and any experience with which industries seem to trade the best for you?
I need a way to "pair" down the list so to speak. Thanks.
Quote from tatankas:
Hi John,
First of all, let me thank you, for all the shared information.
I have read about pairstrading sometime ago, but on that time, i found it unsuitable for individual investors.
Now, with pairtradingfinder, i am changing my mind, but still afraid of the strategy effectiveness, when the market conditions shift for a clear trending line with low volatility.
Anyway, i am doing paper trading, based on ptf signals and some homemade filtering (if you have spare time, take a look on: Short CIEN long GLW).
Regarding the signals generated by ptf, i understand a entry signal is generated when ratio deviates 2STD. Do you know if this is the only data considered? RSI and volatility is also taken in consideration?
What about the exit signals. Do you have any idea how are they calculated?
Best Regards
Re: Number Of Stocks
Quote from LazyLightnin:
Hi Johnny,
I downloaded pairtradefinder and went through their list of industries and back tested them. There are just too many stocks, even ones that correlate well.
Do you have any advice on a cutoff for correlation, like 90%+, 95%+, etc., and any experience with which industries seem to trade the best for you?
I need a way to "pair" down the list so to speak. Thanks.
building database
First, thanks very much for the thread. I've been interested in pair trading for a while and your thread has helped get me focused.
My problem is getting started with the software.
I downloaded the package. I first tried to put all stocks in by sector, ran the backtester and saved all results with correlation > 70% but my list got so long I crashed the program.
Then I cleaned out the whole database and put in one by one the industry list(s) they supplied for each industry (i skipped financials). Then I once again have been running the backtester and this time have only been grabbing those that come up with correlation > 85%.
I figured once all the pairs got in the main watch list I would try to narrow them down some more form the main list.
Unfortunately I am about 1/2 way through the industries and have about 800 pairs (I am not analyzing them beyond finding 85% correlation) and I am crashing the program again, presumably based on the size of my list (I have sent them an email to diagnose). I have a high powered system w/ lots of memory so it should not be a computer issue.
They have been very good in supporting me but i'm getting frustrated in that i must be doing something wrong in my approach.
So... putting aside that their software shouldn't be crashing (hopefully they can fix the problem) i figure i'm just approaching this the wrong way.
If you don't mind maybe you can give me a little guidance. As I mentioned I run the back tester by industry then just grab all pairs with a correlation > 85%. You have far less pairs so...When you are at the back tester level do you analyze them in more detail before putting onto the list?
You also mentioned that you never put the same stock in twice, but if you have one stock that correlates with 3 others very well how do you choose which one to put it onto the list with? My thinking is put them all on the list and then look at the charts when a signal comes up to choose - maybe at a given time one stock will be correlating with a different one better so why not put them all on the list?
Thanks for the journal and any advice you can supply.
Thanks for any thoughts on this.
Mike
Quote from jonnysharp:
thankyou, yes max margin is 1:10, results achieved using leverage.
__________________
Rod
"My destiny will NOT be denied. His will be done." - Patton
Re: Re: Number Of Stocks
Quote from jonnysharp:
What I did was enter all the stock codes from the industries with more than 10 stocks in them, backtested them and applied a filter to only show results above 70% avg correlation and avg profit per trade above $300, then i used the ratio chart in the backtester as I do with my entry signals to find the best pairs in each industry, Ive only got about 70 pairs on my radar, each pair is unique, i.e...the same stock isn't in 2 pairs plus no more than 3 pairs from a particular industry. you can use the backtester data view option and export results to excel, in the spreadsheet there is a running PnL column of each pair, you can collate these together and create a portfolio equity chart. historically technology and financials or old economy stocks, ones that sell commodized products so their business's are highly dependent on a central price, i.e..energies, all have been good to trade, but what you want is a diversified portfolio of pairs.
Full stochastics
Testing strategies...... Divergences in Full Stochastics seems to be pretty reliable. Just my observation. Take it or leave it.
__________________
Scott Lepore
Quote from jonnysharp:
Exited 2 trades;
Sold ETP @ 34.93
Covered PAA @ 37.80
Sold ANV @ 5
Covered GRS @ 6.55
Opened new trade;
Long ZEUS @ 15.87
Short SIM @ 4.60
Volatility
The trading stragegy we have been examining is mean reversion pair trading, dollar neutral. Something I'm beginning to look at, using the data from Jonny's spread sheet is Unilateral Pairs Trading. One assumes that of the two stocks in the pair, one is the cause of the divergence from the mean. If that one can be identified, it can be traded and the other one not. (Yes, that means loosing the protection found with trading the other stock of the pair, the hedge). It is suggested that a way to identify the "wayward" stock is to identify the one with the highest volatility.
I want to test this strategy. I need to know where to find historic volatilities for the single stock of interest (not the pair, which PT gives us). I'll enter that into Jonny's spread sheet and see if there is any correlation between the volatility and profit in each pair Jonny traded since August 2008.
Any suggestion on easily finding historic volatilities? Are there lists, or a charting site where I can simply enter the symbol, date, and get my stat? I've looked without success.
Jonny, thanks for sharing that spread sheet. It's been a terrific learning tool for me. I've analyzed almost every trade to learn how to identify winners from loosers. Still learning.
Walt B
Re: Volatility
Quote from waltbx:
I need to know where to find historic volatilities for the single stock of interest...
Any suggestion on easily finding historic volatilities? Are there lists, or a charting site where I can simply enter the symbol, date, and get my stat? I've looked without success.
Re: Re: Volatility
Quote from total_keops:
If you have the stock data you can use Excel and compute the stdev() on a rolling window of x days. A simple as that.
Re: building database
Quote from mlsignups:
I downloaded the package. I first tried to put all stocks in by sector, ran the backtester and saved all results with correlation > 70% but my list got so long I crashed the program.
Then I cleaned out the whole database and put in one by one the industry list(s) they supplied for each industry (i skipped financials). Then I once again have been running the backtester and this time have only been grabbing those that come up with correlation > 85%.
I figured once all the pairs got in the main watch list I would try to narrow them down some more form the main list.
If you don't mind maybe you can give me a little guidance. As I mentioned I run the back tester by industry then just grab all pairs with a correlation > 85%. You have far less pairs so...When you are at the back tester level do you analyze them in more detail before putting onto the list?
You also mentioned that you never put the same stock in twice, but if you have one stock that correlates with 3 others very well how do you choose which one to put it onto the list with? My thinking is put them all on the list and then look at the charts when a signal comes up to choose - maybe at a given time one stock will be correlating with a different one better so why not put them all on the list?
Thanks for the journal and any advice you can supply.
Quote from Etrade18:
Jonny,
With your SIM trade at what price did you get short? Was it the 4.60 MOC print (like you said u usually get the trades at the MOC print) t
Re: Volatility
Quote from waltbx:
The trading stragegy we have been examining is mean reversion pair trading, dollar neutral. Something I'm beginning to look at, using the data from Jonny's spread sheet is Unilateral Pairs Trading. One assumes that of the two stocks in the pair, one is the cause of the divergence from the mean. If that one can be identified, it can be traded and the other one not. (Yes, that means loosing the protection found with trading the other stock of the pair, the hedge). It is suggested that a way to identify the "wayward" stock is to identify the one with the highest volatility.
I want to test this strategy. I need to know where to find historic volatilities for the single stock of interest (not the pair, which PT gives us). I'll enter that into Jonny's spread sheet and see if there is any correlation between the volatility and profit in each pair Jonny traded since August 2008.
Any suggestion on easily finding historic volatilities? Are there lists, or a charting site where I can simply enter the symbol, date, and get my stat? I've looked without success.
Jonny, thanks for sharing that spread sheet. It's been a terrific learning tool for me. I've analyzed almost every trade to learn how to identify winners from loosers. Still learning.
Walt B
Exited one trade;
Sold MGG @ 15.60
Covered TPP @ 24.08
Volatility effect.
Over a period of years, are pair trades more successful during periods of higher volatility, and less so during periods of lower volatility.
Walt B
Question on Charts
Hi Johnny,
Have you noticed that sometimes the ratio appears to be clearly away from the average line and yet no signals are generated?
Also, have you looked at all at high or low RSI as a condition when a signal is generated? Seems like some good moves come from that but often the outliers appear associated with news.
I've had minor luck so far trying this but I feel like I'm just blindly following the signals without any real confirmation from what I'm seeing. You still having good luck?
Thanks.
Re: Volatility effect.
Quote from waltbx:
Over a period of years, are pair trades more successful during periods of higher volatility, and less so during periods of lower volatility.
Walt B
Calculating profit from ratio change
To calculate the profit from the change in ratios I think this formula will work.
The (% profit) = (% change in the ratios)/2
The following is from my spread sheet on recent trades:
Example 1: The ratio moves up 9.3%, the profit is 4.7%
Example 2: The ratio moves up 23%, the profit is 12.1%
Example 3: The ratio moves up 13.2%, the profit is 6.9%
Try it with some figures of your own.
Walt B
Quote from jonnysharp:
I wish it were this simple, and unless I'm misunderstanding something here, this won't work. It is an increase of 18.18% in the ratio, but the profit won't fall out by multiplying that by one side of the leg.
Am I missing something?
WB
--------------------------------------------------------------------------------
Let me give you an example;
Long $10k ABC @ 100
Short $10k XYZ @ 181
Ratio = 0.55
Sold ABC @ 118
Covered XYZ @ 181
Ratio = 0.65
Profit on ABC = 18% ($1800)
Profit on XYZ = 0% ($0)
0.65 / 0.55 = 1.1818
Re: Question on Charts
Quote from LazyLightnin:
Hi Johnny,
Have you noticed that sometimes the ratio appears to be clearly away from the average line and yet no signals are generated?
Also, have you looked at all at high or low RSI as a condition when a signal is generated? Seems like some good moves come from that but often the outliers appear associated with news.
I've had minor luck so far trying this but I feel like I'm just blindly following the signals without any real confirmation from what I'm seeing. You still having good luck?
Thanks.
Re: Calculating profit from ratio change
Quote from waltbx:
To calculate the profit from the change in ratios I think this formula will work.
The (% profit) = (% change in the ratios)/2
The following is from my spread sheet on recent trades:
Example 1: The ratio moves up 9.3%, the profit is 4.7%
Example 2: The ratio moves up 23%, the profit is 12.1%
Example 3: The ratio moves up 13.2%, the profit is 6.9%
Try it with some figures of your own.
Walt B
entered wednesday
Long TCO @ 18.77
Short SPG @ 42.99
Re: Re: Question on Charts
Quote from jonnysharp:
Yes Ive noticed this, probably something to do with increased volatility. Yes I look at the RSI chart with each signal, i like divergences also you can tell by looking at the RSI chart whether a pair is good to trade or not, i like a chart that looks like a heartbeat graph, regular and consistent oscillations around a average. You gotta stick at it, its not about luck, rather consistent application of a method with a edge, too many traders judge their results after too little trades, treat your trading like a business, losses are business costs and wins are revenue, so long as your revenue exceeds your costs at the end of each quarter you have a profitable business.
Re: Calculating profit from ratio change
Quote from waltbx:
To calculate the profit from the change in ratios I think this formula will work.
The (% profit) = (% change in the ratios)/2
The following is from my spread sheet on recent trades:
Example 1: The ratio moves up 9.3%, the profit is 4.7%
Example 2: The ratio moves up 23%, the profit is 12.1%
Example 3: The ratio moves up 13.2%, the profit is 6.9%
Try it with some figures of your own.
Walt B
Re: Re: Re: Question on Charts
Quote from LazyLightnin:
I've also noticed that sometimes looking at in trade pairs and waiting for a first minor reversal back towards the mean is a good time to jump. These sometimes revert to mean within one to three days. Right now I'm also seeing a lot of ratio charts trending and you are playing against the trend. My biggest problem is trying to pick one chart to act on out of many that look the same. So far I've closed two for two for profit and one in trade under water. I'll keep plugging.
closed 1 trade;
Sold SII @ 24.19
Covered DRQ @ 24.12
2 new trades;
Long HP @ 22.31
Short UNT @ 26.45
Long WWW @ 17.18
Short NKE @ 47.20
HI All,
pair trading newbie here, first post (so be gentle )
I have recently purchased PairTrade Finder and I'm in the process of loading up various pairs in industry groups. Now being based in Australia, I've come to the conclusion our local ASX is too small a market for pair trading, so it looks like NYSE/NASDAQ and/or LSE
If I'm doing things correctly in PairTrader, I won't have a shortage of pairs to trade, however, the big problem I have is brokerage. If I use a local provider to trade CFD's on the NYSE, the brokerage is $10 USD for up to $10K trade, then increases over this lot size. I know you guys don't pay much at all in comparison. So for any given round trip trade per pair I'm up for at least $40 USD, which is about $60 AUD.
I guess I could go and open an account with say IB, but it's not so straight forward for reason's I won't get into right now.
So, if I'm not going to get eaten alive by brokerage, I can only think of 2 things.
1/ Increase my leverage (which isn't something I like doing until I have more thorough knowledge of the system characteristics )
or 2/ increase the average profit per trade
Now for 2/ I was thinking of changing the default "stretch" from 2.0 to say 3.0
I figure this will give me less trades per pair, but the trades I get should be bigger as a consequence of moving the std dev out to 3.
Reducing the number of trades I don't think will hurt too much as it seems there are numerous (>150) pairs for NYSE and I haven't even started on the LSE yet.
Just like to know what people's thoughts are about this situation and my possible solution.
It's a great thread and I've enjoyed reading most of it
TIA
Ivan
Quote from Ivan:
Now for 2/ I was thinking of changing the default "stretch" from 2.0 to say 3.0
I figure this will give me less trades per pair, but the trades I get should be bigger as a consequence of moving the std dev out to 3.
Reducing the number of trades I don't think will hurt too much as it seems there are numerous (>150) pairs for NYSE and I haven't even started on the LSE yet.
Just like to know what people's thoughts are about this situation and my possible solution.
Ivan [/B]
Jonny,
Quote from jonnysharp:
entered wednesday
Long TCO @ 18.77
Short SPG @ 42.99
Quote from Ivan:
I have recently purchased PairTrade Finder and I'm in the process of loading up various pairs in industry groups. Now being based in Australia, I've come to the conclusion our local ASX is too small a market for pair trading, so it looks like NYSE/NASDAQ and/or LSE
If I'm doing things correctly in PairTrader, I won't have a shortage of pairs to trade, however, the big problem I have is brokerage. If I use a local provider to trade CFD's on the NYSE, the brokerage is $10 USD for up to $10K trade, then increases over this lot size. I know you guys don't pay much at all in comparison. So for any given round trip trade per pair I'm up for at least $40 USD, which is about $60 AUD.
I guess I could go and open an account with say IB, but it's not so straight forward for reason's I won't get into right now.
So, if I'm not going to get eaten alive by brokerage, I can only think of 2 things.
1/ Increase my leverage (which isn't something I like doing until I have more thorough knowledge of the system characteristics )
or 2/ increase the average profit per trade
Now for 2/ I was thinking of changing the default "stretch" from 2.0 to say 3.0
I figure this will give me less trades per pair, but the trades I get should be bigger as a consequence of moving the std dev out to 3.
Reducing the number of trades I don't think will hurt too much as it seems there are numerous (>150) pairs for NYSE and I haven't even started on the LSE yet.
Just like to know what people's thoughts are about this situation and my possible solution.
It's a great thread and I've enjoyed reading most of it
Quote from Don87109:
Jonny,
Are you aware that SPG will be going ex-dividend very soon? I think it's 90 cents payable 90% in stock and 10% cash.
Because you are short you will probably have to pay this dividend.
This is the first time they are paying this dividend mostly in stock. In the past it was strictly cash. I wonder if this change has an significant impact on the correlation data.
Don
Closed 2 trades;
Sold SFL @ 11.51
Covered VLCCF @ 14.75
Sold ZEUS @ 18.89
Covered SIM @ 4.95
Opened new trade;
Long BPZ @ 4.30
Short PDC @ 5.08
how's your performance so far?
Quote from LazyLightnin:
I'm new to this too, so take this with a grain of salt. In theory a larger Std. Dev. should produce better results, but you have to look harder at why the spread has gotten so large. Make sure it isn't news or earnings related and possibly check the volume during this time to see if maybe there is heavy buying or selling going on. Either of those situations I think would make the signal unreliable. I'm sure there are other things to think of too.
Quote from jonnysharp:
Looking at the ASX I think you will be able to find plenty of good pairs to trade. When backtesting, filter your pairs for above $300 average profit per trade, therefore your brokerage is well covered, but yes having low commissions is vital to any trading success, focus on good execution aswell, try and trade inside the spread, buy on the bid and sell on the ask, this small edge over time really adds up. You can change the universal stretch to 3.00 and backtest that setting, so you can see what the average profit per trade is and if its better. To reduce your commissions relative to profits try trading more volatile pairs with less size.
Quote from Ivan:
I've started backtesting at 2.5 stretch as I think the 3.0 would be too great. As you probably know the backtesting in PT is quite crude so it takes me a while to manipulate the trades thru excel[/B]
anyone know how he is performing? i would love to see how effective pair trading is, however the post only shows the trade and not the pnl from the trade.
anyone know a place where i can check out the backtested performance of pairtrading?
Quote from Ivan:
Thanks Jonny,
So far my search on the ASX has shown up virtually zero pairs Seems the USA being much bigger would be a better target. I've started backtesting at 2.5 stretch as I think the 3.0 would be too great. As you probably know the backtesting in PT is quite crude so it takes me a while to manipulate the trades thru excel.
From the thread it seems you have been successful with PT for your trading ?
All the best
Ivan
Quote from chiefraven:
anyone know how he is performing? i would love to see how effective pair trading is, however the post only shows the trade and not the pnl from the trade.
anyone know a place where i can check out the backtested performance of pairtrading?
Hi Jonny,
Have you begun to layer your trades as yet? I remember you stating that you were going to layer-in (average-in) during this year. Although it seems beneficial to layer-in, it does skew the risk/reward ratio.
thanks,
Walt
Quote from jonnysharp:
Do you have the ASX stock code list? I can see many pairs. yeah 3.0 stretch has very few trade signals. yes PT has been working great for me.
Ivan there are plenty of good pairs, just look in the materials sector back test for example, attached is a screen shot of a small handful i got from a back test of ASX stocks.
Quote from jones247:
Hi Jonny,
Have you begun to layer your trades as yet? I remember you stating that you were going to layer-in (average-in) during this year. Although it seems beneficial to layer-in, it does skew the risk/reward ratio.
thanks,
Walt
Quote from jonnysharp:
Ivan there are plenty of good pairs, just look in the materials sector back test for example, attached is a screen shot of a small handful i got from a back test of ASX stocks.
one new trade;
Long FMX @ 27.46
Short ABV @ 44.64
Exited one trade;
Sold TMK @ 29.42
Covered MET @ 27.53
hey johnny,
I'm a late arrival to this thread and was wondering if you could tell me what criteria you're using to come up with these pairs?
I know you use the pairtrading finder, but i'm having some issues with my computer right now and can't download the free trailer and try it myself. So if it's not too much trouble, would you mind going over how you go about finding your pairs?
there are obvious many methods at finding co-related pairs.. right? what are some methods you guys have heard of?
ps. has anyone pair traded for a few years now ?
Hi Chief,
Not butting in but when you download the trial version I think they send you a spreadsheet with all the industry groups. Make pairs out of each of the industry groups. Johnny a while back listed exactly how he did it and seems like a good way.
Are you having problems getting the supporting software to work? I had a heck of a time. Took me hours and had me chasing all over Microsoft user groups finding the answers. I don't even know what I did, I just kept working at it. I had .Net framework 2.0 installed and it was corrupted. I had to uninstall it, find a version I could install in an all in one file, and then add the 3.5 version. I think I also had troubles with the Server Express software too. the good thing was that by the time I had the software working it cleared up another problem I had with an I-book external drive and backup that wasn't working.
well i couldn't download the software, because it requires you to download the windows installer as well, and i think windows installer will check if you have a legit copy of windows xp....
=\
Quote from Ivan:
Hey Jonny,
attached is the ASX list which was supplied by PT. See how you go, I'll be interested in your search
regards
Ivan
Quote from LazyLightnin:
Hi Ivan,
I'd be interested in what you find. Looking back through charts RS divergence does seem to work quite well. Too bad it wasn't an automated function to detect it. Hopefully as time goes on they get more buyers of the program it will become more robust.
Someone else posted here that stochastic divergence was yielding good results when used with signals. It's probably showing the same general thing.
Lazy
Quote from tatankas:
SO, in your opinion, a divergence between RSI or stochastic, and pair ratio, should be a trigger to a good pair-trade?
Quote from LazyLightnin:
Somebody else on this thread mentioned the stochastic and said that was their observation. I was just repeating it. The people who produce the program and others look for RSI divergence.
What I did when I found this thread was start right at the beginning and read through it. When I found something I considered insightful and worth remembering I copied it into a Word file. I came up with a list of a few things that way that I could refer back to without searching. Other than a couple of people letting their egos get in the way the thread is worth a read from start to finish, and this is how I came to a lot of these points.
anyone know how to filter for corelations?
Quote from chiefraven:
anyone know how to filter for corelations?
i'm talking about if you're not using that program.
Quote from chiefraven:
i'm talking about if you're not using that program.
sent you a pm
hey guys, in the pictures posted here.... i understand the ratio, and the rsi charts... however, how does pairtrade finder filters for corelations?
can anyone tell me what moving average it uses or something?
=====================
Also, i was wondering if someone could explain how they use the charts i see in these pictures on pairtrade finder...
the rsi chart, the corelation chart... etc etc
for example, one thing that puzzles me is the moving averages... like in some pictures you will have it set to 120 days, some for 150days, some for 55 days, 44 days.....
Another question is that when isee you enter a trade, the corelation chart will sometimes shows it topping at 90%.... but if we're trying to capture the profit when 2 stocks go back into equilibrium, dont we want to enter when corelation is at its lowest.... ?
so in a way.... do we need to use a 356 day moving average to find the stocks that are corelated, and then use a faster moving average to help with entry?
i'm a bit confused on this part.
so what exactly are the rules for corelations, how do you use it for filter, and for entry.... and how do you use rsi for filter, and entry?
hey guys please read through the entire thread before asking questions, ive answered the same questions several times now, I want to keep the journal clean instead of repetitive information, my entire method is explained in detail throughout the journal, what I do isn't really complicated at all, I can't emphasis enough how important it is to keep it simple, less is more. Focus more on keeping your emotions in check rather than constantly trying to tweak or develop a better method, just take the same trades day in day out.
Exited one trade for a small profit
Sold SPN @ 16.42
Covered NOV @ 28.27
pair trading
johnnysharp,
1/ i thank you for this journal.
2/ it is very useful for me
3/ i hope you do it for a while (as long as you make money and beyond)
4/ it is very informative
i also wanted to share something . Iwas surfing the web and i came accross this article.
I am a newbie and i use a Spread betting co to trade a small amount. As you know the trouble is the spread. However , i discovered that in some area i could use Shares Versus Index.
Anyway just a thought.
Again thansk for the journal and all the best.
-quote-
Shares Versus Index
* Another way to pairs trade using spread bets is to trade a stock against the underlying index
http://www.learnmoney.co.uk/spread-betting/pairs-3.html
-unquote-
__________________
thank you and may the force be with you
I don't know too much about spreadbetting, I like to trade inside the spread, why don't you try a CFD provider with direct market access. Im not a fan of share vs index pairs because its not 2 similar business's and that is the foundation of pair trading.
Exited one trade at profit
Sold WWW @ 17.07
Covered NKE @ 44.46
Entered new trade
Long ESV @ 26.65
Short ATN @ 16.42
Quote from chiefraven:
hey guys, in the pictures posted here.... i understand the ratio, and the rsi charts... however, how does pairtrade finder filters for corelations?
can anyone tell me what moving average it uses or something?
The graph...
exited one trade for profits
Sold TCO 17.64
Covered SPG @ 38.05
one new trade
Long CTX @ 8.54
Short KBH @ 11.76
Qustion on trade
Johnny:
Great journal...seems like if my math is correct you are running above a 40% IRR making certain assumptions. Great job! You've got me very interested in this topic.
I have two questions. I recently purchased pairtrader and was looking at some of your trades to learn from them. I changed my settings to those you shared a month or two ago and looking back the software signaled an entry for SPG/TCO on 1/21, yet you entered the trade on 2/4 or 2/5, although it appears you exited with their exit signal.
FYI I have correlation lookback at 100 days, Std Dev 20, RSI Lookback 20, ratio lookback 14, stretch 14, pair stretch 2.
Are my settings off or different at this point or did you delay entering the first trade for a reason?
Also, on the recent HP/UNT trade, the correlation looks very good but is on a slight downslope and I think at one point you mentioned you liked entering when correlations were on an upslope. It seems that their ratio chart is great so I was wondering if the fact that it was still so high, despite not being as high as it was...was the reason you took this trade?
Thanks so much.
Mike
hey guys,
anyone find correlated pairs by using excel or methods other than pairtrade finder?
Can anyone describe how they find their pairs? Do you get a list of all tradable symbols from a certain source, then input them all into an excel sheet?
but how do you find the correlations between symbols.... i mean if i was to have a symbol in mind, and want to match a symbol with it, then all i have to do is find a stock that has 70 or 80 or above correlation .... however, given a list of stocks... how does it find all the permutations of correlations between pairs?
If anyone can help me get started without using pairtrade finder, i would really appreciate it.
I want to be able to use the excel sheet to find pairs to trade, then enter those pairs into my Tradestation watchlist, and watch them on charts manually since i have added my own filters...... but before i can even backtest it, i really need to figure out how i can find pairs and correlations without using pairtrade finder.
if anyone can help, i would be greatly appreciate it
Quote from chiefraven:
hey guys,
anyone find correlated pairs by using excel or methods other than pairtrade finder?
Can anyone describe how they find their pairs? Do you get a list of all tradable symbols from a certain source, then input them all into an excel sheet?
but how do you find the correlations between symbols.... i mean if i was to have a symbol in mind, and want to match a symbol with it, then all i have to do is find a stock that has 70 or 80 or above correlation .... however, given a list of stocks... how does it find all the permutations of correlations between pairs?
If anyone can help me get started without using pairtrade finder, i would really appreciate it.
I want to be able to use the excel sheet to find pairs to trade, then enter those pairs into my Tradestation watchlist, and watch them on charts manually since i have added my own filters...... but before i can even backtest it, i really need to figure out how i can find pairs and correlations without using pairtrade finder.
if anyone can help, i would be greatly appreciate it
WILL TRADE__________________
HAVE STOP img src="http://www.enflow.com/p.gif" WILL TRADE
pair trading options
First, I did purchase pairtradefinder. I thought it could help me get started in pairtrading...not just in finding pairs but in signals in and out. So far I like it although there are aspects of it I find frustrating and would like to see improved.
So while i plan on using pairtradefinder, there are a few other options for the correlations you want.
First, the prior post mentioned you can download data into excel from yahoo end of day and use the correlation function. For what it's worth the google spreadsheet online have a function to extract data from google historical finance pretty easily but i don't know if they have a correlation function.
Second, there is a web site (i'm trying to find the link) that is free where if you know you have one stock and want to see the correlation you put that symbol in and it gives you a complete list. if/when i find the link i will edit this post or upload it. but you have to look this up one symbol at a time.
Finally, I have for years used a program called AmiBroker, which is a charting platform with a robust programming langugage that is pretty cheap for end of day (around $200). if you know some programming it is easy to build a routine that cycles through all the stocks to compare to one you enter or to compare all to all (although it runs for a while). I did this but decided to stay with pairtradefinder for now since i was less confident about my abiltiy to enter/exit then i was to find the pairs.
Mike
RSI 40/60
Yobo...
Assuming you are following this thread... i was curious what your thinking was on having individual RSI's above 40 and under 60.... Could you share your thoughts on why you added this as a criteria to your trades?
Thanks
Mike
Re: Qustion on trade
Quote from mlsignups:
Johnny:
Great journal...seems like if my math is correct you are running above a 40% IRR making certain assumptions. Great job! You've got me very interested in this topic.
I have two questions. I recently purchased pairtrader and was looking at some of your trades to learn from them. I changed my settings to those you shared a month or two ago and looking back the software signaled an entry for SPG/TCO on 1/21, yet you entered the trade on 2/4 or 2/5, although it appears you exited with their exit signal.
FYI I have correlation lookback at 100 days, Std Dev 20, RSI Lookback 20, ratio lookback 14, stretch 14, pair stretch 2.
Are my settings off or different at this point or did you delay entering the first trade for a reason?
Also, on the recent HP/UNT trade, the correlation looks very good but is on a slight downslope and I think at one point you mentioned you liked entering when correlations were on an upslope. It seems that their ratio chart is great so I was wondering if the fact that it was still so high, despite not being as high as it was...was the reason you took this trade?
Thanks so much.
Mike
thanks Johnny...
regarding HP/UNT at least on my screen the correlation was over 99% since Octopber (over 3 months) and recently looks like it dropped under 99% to mid 98s. I know that is probably insignificant but on my chart it looks like a bit of a downslope ; emphasizing " a bit".
Re: pair trading options
Quote from mlsignups:
Finally, I have for years used a program called AmiBroker, which is a charting platform with a robust programming langugage that is pretty cheap for end of day (around $200). if you know some programming it is easy to build a routine that cycles through all the stocks to compare to one you enter or to compare all to all (although it runs for a while). I did this but decided to stay with pairtradefinder for now since i was less confident about my abiltiy to enter/exit then i was to find the pairs.
Mike
Quote from chiefraven:
hey guys,
anyone find correlated pairs by using excel or methods other than pairtrade finder?
You can find a comprehensive list of the top correlated pairs in the market, as well as stocks that correlate well to a specific stock of your choice, at
http://impactopia.com/
While being familiar with this resource, I have still purchased the Pairtrade Finder software.
I haven't gone through the 95 pages of this thread yet so please excuse me. But, from the few that I did read, this sounds very interesting. Could you tell me if there's some class that someone could take to get a good start in this? I'm an experienced trader but pairs trading is somewhat new to me.
oh yeah i just found out about
http://impactopia.com/
yesterday.
however, with this you have to type in a symbol... i was wondering if there is a way to just import a list of stocks and have it do the correlation calculation against all pairs..
Amibroker
First, Impactopia was the site I knew of but couldn't find today. I think registration is (or was) free when I registered some time back.
Second, this has been a great journal and I don't want to get anyone sidetracked so i won't go down this path too much longer if it is not needed or desired.
I did some interesting stuff with AmiBroker today. It is not designed out of the shoot for pair trading but it is easy to compare tickers and/or display them and ratios. I was able to recreate the charts that show up with a pair in pairtradefinder. I was actually able to recreate the entry and exit signals of most of the trades (not sure if i can catch them all) but out of deference to the folks at pairtradefinder won't go into what I found.
As I mentioned in my last thread i purchased the software (pairtradefinder) and intend to use it, so this is not a knock on them but I thought AmiBroker might help me refine my thinking as follows.
Assuming I have recreated the entry and exit signals I can now back test against a large basket of stock pairs at once for P&L. I can also now add some other criteria. For instance, since we want the correlation to be going up, I could add as a criteria to my backtest that I want correlation to be > 90% and that I want correlation to be greater than an x day moving average of correlation (so I know it is on the upswing). I could also add that the correlation for the last x days is > than x. There was also a post early by another contributor who talked about RSI of one stock being above 40 and another below 60. I can now add that parameter and backtest that to see how the results (P&L) change.
So my thinking is I can take what i've learned from their system and test various permutations of add-on criteria to see if any of these criteria improve the results.
IF I figure some of this out my thinking would be I can then use pairtradefinder during the day to identify the entries, but would then have more information about which ones to select for entry.
As I get time over the next few weeks i'll post some findings unless Johnny says this is too far off track for his journal.
Mike
Quote from chiefraven:
... how does it find all the permutations of correlations between pairs?
Re: Amibroker
Quote from mlsignups:
First, Impactopia was the site I knew of but couldn't find today. I think registration is (or was) free when I registered some time back.
Second, this has been a great journal and I don't want to get anyone sidetracked so i won't go down this path too much longer if it is not needed or desired.
I did some interesting stuff with AmiBroker today. It is not designed out of the shoot for pair trading but it is easy to compare tickers and/or display them and ratios. I was able to recreate the charts that show up with a pair in pairtradefinder. I was actually able to recreate the entry and exit signals of most of the trades (not sure if i can catch them all) but out of deference to the folks at pairtradefinder won't go into what I found.
As I mentioned in my last thread i purchased the software (pairtradefinder) and intend to use it, so this is not a knock on them but I thought AmiBroker might help me refine my thinking as follows.
Assuming I have recreated the entry and exit signals I can now back test against a large basket of stock pairs at once for P&L. I can also now add some other criteria. For instance, since we want the correlation to be going up, I could add as a criteria to my backtest that I want correlation to be > 90% and that I want correlation to be greater than an x day moving average of correlation (so I know it is on the upswing). I could also add that the correlation for the last x days is > than x. There was also a post early by another contributor who talked about RSI of one stock being above 40 and another below 60. I can now add that parameter and backtest that to see how the results (P&L) change.
So my thinking is I can take what i've learned from their system and test various permutations of add-on criteria to see if any of these criteria improve the results.
IF I figure some of this out my thinking would be I can then use pairtradefinder during the day to identify the entries, but would then have more information about which ones to select for entry.
As I get time over the next few weeks i'll post some findings unless Johnny says this is too far off track for his journal.
Mike
)
Johnny, does the Pairtradefinder require to watch the software the entire trading session, or will trades be taken at the close, or at another particular point of time?
Thanks
Saico
he usually watches near the close i believe and get in near the closing price.
does anyone know how to find pairs with excel ? i mean yes i know i can get a certain amount of data for each symbol and then track the two symbol's correlations that way, but that requires me to get the data and import them each time, and that's only 1 pair.... do people actually do this over and over for ALL the symbols in their universe?
there's got to be an easier way
Quote from chiefraven:
there's got to be an easier way
!
Quote from chiefraven:
he usually watches near the close i believe and get in near the closing price.
does anyone know how to find pairs with excel ? i mean yes i know i can get a certain amount of data for each symbol and then track the two symbol's correlations that way, but that requires me to get the data and import them each time, and that's only 1 pair.... do people actually do this over and over for ALL the symbols in their universe?
there's got to be an easier way
WILL TRADE__________________
HAVE STOP img src="http://www.enflow.com/p.gif" WILL TRADE
Quote from chiefraven:
there's got to be an easier way
Quote from total_keops:
C++
)... that would require knowledge of how to code in C++ plus code maintenance would be required over time too.. WILL TRADE__________________
HAVE STOP img src="http://www.enflow.com/p.gif" WILL TRADE
as previously mentioned multiple times, excellent thread
I've also recently purchased/started paper trading signals via pairtradefinder
This seems to be an excellent resource. I am almost exclusively a day trader, but would like to implement this system.
Does anyone out there trade options as pairs? I've been considering this as to limit the potential catastrophe in any overnight events. Could be an outright purchase of a put and a call or possible spreads.
Seems like possibly a good way to limit risk to some extent, obviously adds a component of complexity. I would love to hear anyone's opinions/suggestions
Exited one trade for profits;
Sold HP @ 21.75
Covered UNT @ 23.99
Entered new trade;
Long RAIL @ 16.35
Short CP @ 28.78
Quote from jonnysharp:
Exited one trade for profits;
Sold HP @ 21.75
Covered UNT @ 23.99
Entered new trade;
Long RAIL @ 16.35
Short CP @ 28.78
Did anyone who installed Pairtradefinder experience SQL Database problems as well like me? Even the troubleshooting plan from Pairtradefinder.com did not help. Much thanks in advance!
Saico
pairtraderfinder
i did have some problems on one computer. i then tried it on my other computer and it worked so i didn't mess with it much more. Since this is a personal application and i'm not sure why they didn't just use Access or something similar as it would have been much less grief to set up.
I bought the software and the folks there (Jared) have been incredibly responsive to my needs so I want them to succeed but to be honest the product is a bit frustrating to use. Version 2 has crashed on me a number of times (mostly because I identified and loaded too many pears).
But i'm working through the issues and trying to stay with it as I think there is value in the product as evidenced by the results in this journal.
Mike
Exited 2 trades;
Sold SE @ 13.09
Covered EP @ 7.52
Sold ESV @ 25.2
Covered ATN @ 14.39
Opened 1 new trade;
Long AXA @ 10.28
Short PUK @ 8.18
Exited one trade
Sold KIM @ 8.78
Covered WRI @ 10.49
New trade
Long ALV @ 15.42
Short MGA @ 25.72
Quote from jonnysharp:
Exited one trade
Sold KIM @ 8.78
Covered WRI @ 10.49
New trade
Long ALV @ 15.42
Short MGA @ 25.72
Nov lows take 2
johnny,
Since the current markets remind me of November lows are you seeing somewhat similar behavior of your pairs? Say, are you more likely to pick low correlation stocks since they may 'snap back' like last time, and produce better returns? Are you eye balling your charts a little bit differently? Perhaps you consider going long 120% for some 'side trades'?
ps: were u able to backup your copy of the database and restore it latter? Doesn't seem to work for me....
Quote from saico:
Johnny,
MGA has earnings announcement today. Doesn't that any matter in your trading style?
Thanks
Saico
Re: Nov lows take 2
Quote from tekka:
johnny,
Since the current markets remind me of November lows are you seeing somewhat similar behavior of your pairs? Say, are you more likely to pick low correlation stocks since they may 'snap back' like last time, and produce better returns? Are you eye balling your charts a little bit differently? Perhaps you consider going long 120% for some 'side trades'?
ps: were u able to backup your copy of the database and restore it latter? Doesn't seem to work for me....
2 new trades
Long WLL @ 22.33
Short PTEN @ 8.55
Long ATN @ 13.09
Short RIG @ 58.15
Johny,
What are your brokerage commissions, on the short and long side?
Thanks
Quote from jonnysharp:
Exited 2 trades;
Sold SE @ 13.09
Covered EP @ 7.52
Sold ESV @ 25.2
Covered ATN @ 14.39
Opened 1 new trade;
Long AXA @ 10.28
Short PUK @ 8.18
Quote from tatankas:
Johny,
What are your brokerage commissions, on the short and long side?
Thanks
Exited one trade
Sold BPZ @ 3.65
Covered PDC @ 4.15
New trade
Long ABG @ 3.33
Short GPI @ 11.07
Quote from jonnysharp:
Same for both sides, half a cent per share.
trade idea
ok...finally have my act together...going to try to start trading pairs also...
Johnny:
one i found tonight that has a great ratio chart is CNQ/SM. The software issued a trade 5 or 6 days ago but they have even diverged more since then.
only question is the SM had a significant loss reported in last few days which has created the larger diversion. is that news reason not to take this trade?
also, i noticed you made some profit on the HP/UNT trade but then a day or two later the reverse trade was signaled and you didn't take that trade...and that too has gotten ever more divergent. is there a reason you would pass on this leg of the trade even though you took the other side and watch the pair?
Thanks
Mike
Quote from yobo:
I am basing everything on the 50 day average.
[/B]
Quote from tatankas:
Besides spread and RSI, whatelse are you looking at?
You don't compare different time-frames?
I am analyzing, differential, ratio, spread, correlation and density curve, on different time frames, 15/30/90 and 180 days.
To be honest, I think I need to simplify my method, i am getting lost with so many data and charts.
Re: trade idea
Quote from mlsignups:
ok...finally have my act together...going to try to start trading pairs also...
Johnny:
one i found tonight that has a great ratio chart is CNQ/SM. The software issued a trade 5 or 6 days ago but they have even diverged more since then.
only question is the SM had a significant loss reported in last few days which has created the larger diversion. is that news reason not to take this trade?
also, i noticed you made some profit on the HP/UNT trade but then a day or two later the reverse trade was signaled and you didn't take that trade...and that too has gotten ever more divergent. is there a reason you would pass on this leg of the trade even though you took the other side and watch the pair?
Thanks
Mike
New trade
Long PQ @ 3.37
Short ROSE @ 5.39
Quote from jonnysharp:
New trade
Long PQ @ 3.37
Short ROSE @ 5.39
the PQ ROSE trade...
just looking at an overlay charts of the two stocks.... there's not much deviation to exploit ....... in addition...... these two pairs are about to cross... meaning that the higher one is crossing to become the lower one.... and the higher one is dropping down and becoming a lower one...... and when this happens..... when you try to pairtrade at this area... most of the time it will fail.... just a heads up
PQ-ROSE
Johny:
I'm trying to replicate your correlation chart in my pairtradefinder for this and i can't get the correlation to match. Can you share again your lookback period? At one point in the journal you indicated I think it was 100 days. Is that what you still are using?
Also, i don't know if the program is supposed to do this but there are two lines of data in your chart for 2/23... i don't have that in mine...i don't know if that could be why mine is different than yours.
Mike
IQ feed
I was wondering if using IQ feed is helping traders make better profits. Seems to me that often trade execution is crucial to the profits. Comments from IQ users really appreciated.
Another question is on the volatility graph. Is anybody actually paying attention to that one? Is showing the volatility of the actual ratio (similar to RSI), or something else.
And finally, does anybody have and idea when the next version of PTF is coming out?
Quote from saico:
Hi Johnny,
for me I decided to pass signals on penny stocks for several reasons. First of all, those stocks are a subject for many gamblers in market. They can be moved very easyly because of their low price. Even more when that stock is a low volume stock. Just see the examble with the pair you just posted. If you would have taken the signal on feb. 19, your position would have seen a massive drawdown. Even its a dollar neutral trade. Those stocks are that low for a reason and the selling pressure is usually higher than in higher priced stocks. I think there are a lot of other signals out there on pairs that include solid stocks. The risk is not worth it to take these ones imo. Just my 2 cents, Johnny.
Saico.
Re: PQ-ROSE
Quote from mlsignups:
Johny:
I'm trying to replicate your correlation chart in my pairtradefinder for this and i can't get the correlation to match. Can you share again your lookback period? At one point in the journal you indicated I think it was 100 days. Is that what you still are using?
Also, i don't know if the program is supposed to do this but there are two lines of data in your chart for 2/23... i don't have that in mine...i don't know if that could be why mine is different than yours.
Mike
Re: IQ feed
Quote from tekka:
I was wondering if using IQ feed is helping traders make better profits. Seems to me that often trade execution is crucial to the profits. Comments from IQ users really appreciated.
Another question is on the volatility graph. Is anybody actually paying attention to that one? Is showing the volatility of the actual ratio (similar to RSI), or something else.
And finally, does anybody have and idea when the next version of PTF is coming out?
Fundamental Problem With Pairs Trading...
When pair trading two stocks (preferably within the same sector), there's a MAJOR PROBLEM with the mean-reversion strategy. The assumption is that the two stocks will converge after diverging to a certain point. Oftentimes, layering-in is used to improve the performance of the mean-reversion plan (i.e. "it did not revert on the 1st entry, let's try to enter again - hoping that the reversion will occur after the next std deviation).
This is the crux of the problem: If fundamentals dictate that you long the strong stock and short the weaker stock, then one would think that the stock is more likely to continue to diverge rather than converge. To bet on a mean-reversion, one would typically need to short the strong stock and long the weak stock. In doing so, it appears that you're betting against market fundamentals.
In a nutshell, my theory is that it may be better to trade with the trend of the divergence than to try and anticipate a reversal (mean reversion) of the two stocks. In other words, once a pair start to diverge (especially if supported by fundamentals such as earnings or news reports), then enter the spread with the plan of the divergence continuing.
Perhaps mean-reversion would be better suited with indicies, such as the spy vs. dia...
your thoughts... Do you see a problem with my logic???
Thanks,
Walt
Re: Fundamental Problem With Pairs Trading...
Quote from jones247:
Do you see a problem with my logic???
Re: Fundamental Problem With Pairs Trading...
Quote from jones247:
your thoughts... Do you see a problem with my logic???
Thanks,
Walt [/B]
Re: Fundamental Problem With Pairs Trading...
Quote from jones247:
When pair trading two stocks (preferably within the same sector), there's a MAJOR PROBLEM...
your thoughts... Do you see a problem with my logic???
If you are using a value strategy, you would many times be getting long the weaker stock and shorting the higher multiple growth stock. As others have stated you are playing these types of pairs for a longer time frame, using larger distribution levels for layering and trying to capture as much noise as possible as the fundamentals come into line, which may take years, or never occur at all. For me, as long as there is enough noise or chop in the spread for me to trade I don't really care if the fundamentals come in or not. I just need a bias to lower the risk of getting caught in a buyout, and historically value has outperformed growth over the long term.
Re: Re: Fundamental Problem With Pairs Trading...
Quote from total_keops:
If you read the book Statistical Arbitrage, [/B]
Johnny, what stretch values do you use for your 2nd and 3rd layer?
Thanks
saico
Re: Fundamental Problem With Pairs Trading...
Quote from jones247:
When pair trading two stocks (preferably within the same sector), there's a MAJOR PROBLEM with the mean-reversion strategy. The assumption is that the two stocks will converge after diverging to a certain point. Oftentimes, layering-in is used to improve the performance of the mean-reversion plan (i.e. "it did not revert on the 1st entry, let's try to enter again - hoping that the reversion will occur after the next std deviation).
This is the crux of the problem: If fundamentals dictate that you long the strong stock and short the weaker stock, then one would think that the stock is more likely to continue to diverge rather than converge. To bet on a mean-reversion, one would typically need to short the strong stock and long the weak stock. In doing so, it appears that you're betting against market fundamentals.
In a nutshell, my theory is that it may be better to trade with the trend of the divergence than to try and anticipate a reversal (mean reversion) of the two stocks. In other words, once a pair start to diverge (especially if supported by fundamentals such as earnings or news reports), then enter the spread with the plan of the divergence continuing.
Perhaps mean-reversion would be better suited with indicies, such as the spy vs. dia...
your thoughts... Do you see a problem with my logic???
Quote from saico:
Johnny, what stretch values do you use for your 2nd and 3rd layer?
Thanks
saico
Re: Re: Fundamental Problem With Pairs Trading...
Quote from jonnysharp:
however with what you said you could be long the strong stock and short the weak stock after they made a divergence(strong stock went down, weak stock went up) so you are on the right side of the fundamentals and still capture the convergence. I think your thinking more of long/short trading, where you trade the divergence, i.e.....buy a fundamentally strong stock on a upside breakout and short a fundamentally weak stock on a downside breakout. This strategy can work too, however as others stated is more medium/long term trading as opposed to capturing short and sharp moves with pair trading.
Re: Re: Re: Fundamental Problem With Pairs Trading...
Quote from jones247:
Excellent points jonny... I guess my assumption was that very rarely would there be a divergence with the strong stock going down and the weak stock going up. If that were to happen, I would have to wonder if there is some event that I haven't learned about (i.e. merger/acquisition). Nonetheless, my aim would be to get in and out of all pair trades as soon as possible (preferably intraday trades with the spreads)...
Walt
Hi everyone.
Firstly thanks to jonny for starting this thread. I have been following with interest and have read the whole thread in recent days. Also, congratulations on your amazing results.
Yobo, keep up the good work also, I value your input to this thread.
I've been trading through mechanical systems for a few years now, and was wondering if anybody here trades a Pair Trading system similar to jonny's one?
If so, can you please send me a PM so we can discuss it there and not clog up jonny's thread.
I was reading an academic paper on Pairs Trading by a couple of guys from Yale the other day. Interestingly, according to them, stocks from different sectors didn't make much of a difference to returns. They tested their strategy from 1960s to 2002 and it showed significant outperformance of the S&P500, about double the excess return with third to half of the risk.
In addition, their strategy outperformed in bear and sideways markets (like the 70s) but underperformed during the recent 1990s bullmarket. Therefore, it would compliment my trendfollowing system rather nicely.
Attached is the article Im talking about.
But again, if you already trade a mechanical Pairs Trading system or are in the process of designing such a system, please let me know through PM.
Nizar.
yobo
Your methods sound great!
Can you comment on your success using 1st vs 3rd method? Are any of them better performers in certain type of the markets?
Also, for the 3rd method given the choppiness of the markets did you experiment with shorter term averages, like 14 and 50? And to clarify, you go long (or short) BOTH stocks in the pair. How do you incorporate RSI. Are you seeing that RSI of the ratio is a heat beat and in 30-70 range? How do you choose the pair to begin with? Correlation/same sector? On average how long you hold the pair in last 4 months?
I'm sorry that I'm asking so many questions and not offering anything in return.... helpfully for now.
New trade
Long CBM @ 1.87
Short OMPI @ 5.04
New trades
Long CVO @ 2.44
Short NP @ 5.13
Long ACE @ 33.95
Short ACGL @ 51.34
Does anyone have extensive experience with pair trading the ETF indicies (i.e. SPY vs. DIA)? This seems much "safer" than pair trading stocks. No merger/acquisition fears; No earnings suprise; no major news to impact it the way a stock would be impacted; etc...
Of course, the major downside is the small divergence and convergence moves during most days. However, a major consideration is that the convergence between these two pairs has moved about 10 points in the last 7 months. There seems to be a direct correlation between convergence/divergence and the direction of the market. On a daily or short-term basis, I believe that the layering strategy can work pretty well.
Any thoughts....
Walt
If you want something really safe play IVV:SPY, IAU:GLD.
Just kiding, it's all automated.
The more obvious something is, the more people are looking at it and there is therefore less and less opportunities.
To make money in DIA:SPY you need to take more risk (bigger size) per trade because the expected yield is smaller.
You must look for dividend and also rebalancement in the ETF. I have no clue how to get that info.
So, to me, it's a pair like any other one. Maybe there is some risks that disapear but it's all balanced by the lower expeted yield.
The way I see it it's better to spread your risk over many small trades and a good analysis of the potential risks.
I guess it could be a good candidate for yobo method #3.
Good luck.
Quote from total_keops:
If you want something really safe play IVV:SPY, IAU:GLD.
Just kiding, it's all automated.
The more obvious something is, the more people are looking at it and there is therefore less and less opportunities.
To make money in DIA:SPY you need to take more risk (bigger size) per trade because the expected yield is smaller.
You must look for dividend and also rebalancement in the ETF. I have no clue how to get that info.
So, to me, it's a pair like any other one. Maybe there is some risks that disapear but it's all balanced by the lower expeted yield.
The way I see it it's better to spread your risk over many small trades and a good analysis of the potential risks.
I guess it could be a good candidate for yobo method #3.
Good luck.
In my experience, you want to embrace the risk of stock vs. stock pairs instead of ETF's because you get much more oppurtunity, especially when using a layering strategy. I am referring to mean reverting pairs. Too much correlation is not good, just like too little is not good. Change the strategy, like trend following then too little is a good thing. Also look treat every relationship differently, each pair has a personality and needs to be treated as such. I think it is a common misconception among beginning pairs traders and I struggled with it for a long time.
Jonny,
What are you finding are your typical holding times right now?
I did 8% total net return in 2 months which I felt was pretty good. For the first 1-1/2 months the trades were very short and showing good profit. Usually only green on one side. Some pairs were held only a day. I have been taking profits whether the pair gives an exit signal or not if I get a decent percentage spike.
The last couple of weeks the pairs have been moving lock step and not generating profit in the same manner. I was wondering if you are seeing the same thing? Might just be the very directional moves of the market?
Thanks,
Lazy
Johnnysharp....First let me thank you for this pairtrading journal. Have you updated your results since posting them on page 71 of this journal? If not, could you perhaps post them here for us?
Quote from samueldoernte:
In my experience, you want to embrace the risk of stock vs. stock pairs instead of ETF's because you get much more oppurtunity, especially when using a layering strategy. I am referring to mean reverting pairs. Too much correlation is not good, just like too little is not good. Change the strategy, like trend following then too little is a good thing. Also look treat every relationship differently, each pair has a personality and needs to be treated as such. I think it is a common misconception among beginning pairs traders and I struggled with it for a long time.
Quote from LazyLightnin:
Jonny,
What are you finding are your typical holding times right now?
I did 8% total net return in 2 months which I felt was pretty good. For the first 1-1/2 months the trades were very short and showing good profit. Usually only green on one side. Some pairs were held only a day. I have been taking profits whether the pair gives an exit signal or not if I get a decent percentage spike.
The last couple of weeks the pairs have been moving lock step and not generating profit in the same manner. I was wondering if you are seeing the same thing? Might just be the very directional moves of the market?
Thanks,
Lazy
Quote from ascheer7:
Johnnysharp....First let me thank you for this pairtrading journal. Have you updated your results since posting them on page 71 of this journal? If not, could you perhaps post them here for us?
Quote from thetrendfollowe:
...
I was reading an academic paper on Pairs Trading by a couple of guys from Yale the other day. Interestingly, according to them, stocks from different sectors didn't make much of a difference to returns. They tested their strategy from 1960s to 2002 and it showed significant outperformance of the S&P500, about double the excess return with third to half of the risk.
In addition, their strategy outperformed in bear and sideways markets (like the 70s) but underperformed during the recent 1990s bullmarket. Therefore, it would compliment my trendfollowing system rather nicely.
Nizar.
Wednesdays trade
Long WWW @ 14.49
Short NKE @ 42.55
Quote from total_keops:
I did not read the paper in all but I can say be very carefull. Things evolved over time. As you can see in their sugar coated equity curve, the early days of pairs trading where very good but people catched on the deal and opportunities are smaller theses days. I suggest you read the book Statistical Arbitrage before getting wet. It say that Merrill was doing that all automated in the 80's with good results but now with all the hedge funds and access to technology more people are doing it and the easy strategy is arbed away.
Whenever you see an academic paper think twice. Academics have their own schedule. They are in the business of "knowledge", we are in the business of making money.
Quote from jonnysharp:
2 new trades;
Long BAS @ 10.80
Short HAL @ 17.93
Hi Jonny.
Gotta question for you.
What do you do when you enter a pair but then a few days after entry they start diverging and actually don't converge back due to fundamental reasons (eg. one reported profit, the other a huge loss). Would you exit this pair on a discretionary basis because there's a good reason?
Or does your system have rules to prevent this from becoming too damaging?
Eg. a time-based stop (exit after X days if the pair does not revert to the mean) or a maximum stop loss (at like 4sd) ?
I'd be keen to hear your thoughts.
Nizar.
Quote from waltbx:
Hey Jonny, are you still in the BAS/HAL pair (1/12/09), or did I miss the close of the pair?
Walt B
Quote from thetrendfollowe:
Hi Jonny.
Gotta question for you.
What do you do when you enter a pair but then a few days after entry they start diverging and actually don't converge back due to fundamental reasons (eg. one reported profit, the other a huge loss). Would you exit this pair on a discretionary basis because there's a good reason?
Or does your system have rules to prevent this from becoming too damaging?
Eg. a time-based stop (exit after X days if the pair does not revert to the mean) or a maximum stop loss (at like 4sd) ?
I'd be keen to hear your thoughts.
Nizar.
Exited trades
Sold ACE @ 33.96
Covered ACGL @ 49.34
Sold ALV @ 12.82
Covered MGA @ 21.25
New trade
Long THG @ 30.63
Sold PTP @ 25.99
Quote from jonnysharp:
I strictly stick to the system and wait for an exit signal, which is when the pair comes back to its mean.
Quote from thetrendfollowe:
Hi Jonny.
Can you read my question again brother?
My question was relating to what you would do when the pair DOESN'T revert back to its mean within your expected timeframe.
So you'd just keep waiting?
Potentially forever?
Thanks.
Quote from jonnysharp:
Yes I wait as it will always come back eventually.
Re: Re: Re: Re: Fundamental Problem With Pairs Trading...
Quote from yobo:
...Just want to add one thing to Walts comments. There are two types of pairs. Ones that trend in a direction and the ones that dance up and down around a mean without really going in any direction...
Re: Re: Re: Re: Re: Fundamental Problem With Pairs Trading...
Quote from total_keops:
Do you trade both styles so you are kind of hedged against trendy markets? Like jonny said right now the pairs just seems not to converge (revert to the mean) but they will if the market stop it's short term downtrend. I can imagine that trendy pairs are doing well right now? So your trendy pairs compensate for the mean reverting that dont revert. And the same thing in a choppy market, the mean reverting ones are going to do well and the trendy ones may stall. Do you split your portfolio 50/50 between mean reverting and trending or is it just not a concern or you never thought about it?
Quote from jonnysharp:
Yes I wait as it will always come back eventually.
Quote from thetrendfollowe:
LOL thats exactly what the Amaranth and LTCM guys said!
But that's cool, thanks for your response.
Quote from jonnysharp:
Yes I wait as it will always come back eventually.
[QUOTE]Quote from thetrendfollowe:
LOL thats exactly what the Amaranth and LTCM guys said!
But that's cool, thanks for your response.
Has anyone been catching the moves on CIEN/GLW lately? just had a look at this pair, in the last week there has been 3 trades, all quick and big profits, these stocks are in play atm
Re: Re: Re: Re: Re: Fundamental Problem With Pairs Trading...
Quote from total_keops:
Do you trade both styles so you are kind of hedged against trendy markets? Like jonny said right now the pairs just seems not to converge (revert to the mean) but they will if the market stop it's short term downtrend. I can imagine that trendy pairs are doing well right now? So your trendy pairs compensate for the mean reverting that dont revert. And the same thing in a choppy market, the mean reverting ones are going to do well and the trendy ones may stall. Do you split your portfolio 50/50 between mean reverting and trending or is it just not a concern or you never thought about it?
Quote from saratur:
Maybe it is not clear: A pair reverting to its mean does not necessarily imply the trade is profitable. That "mean" is a moving average with limited length, e.g. a few weeks. So if the pair diverges and the ratio increases, the moving average goes up as well; a trade that was open for a long time could close by reverting to a mean value that is significantly higher when it opened.
Hello Johnny,
I know its your journal, so posting trades is your part. I hope you don't mind me posting a DIA/SPY signal because this pair generates only a view signals during the year, but usually good ones.
saico
L: SPY
S: DIA
Yeah no problem saico, anyone can post trades here, I wouldn't mind a bit of friendly competition. I don't pair trade ETF's for reasons previously stated, however with enough leverage the SPY/DIA trade could prove worthwhile.
Exited one trade
Sold AXA @ 7.87
Covered PUK @ 5.92
New trade
Long PDC @ 3.49
Short RDC @ 11.83
Hi Jonny,
I noticed that you do in fact take losses, but I am not sure I understand the criteria for taking the loss.
Is it time based, for example after so many months, you will close out the trade?
Or since you mentioned that you use the software to take the loss, is it due to the pairs ratio no longer being correct ie positively corelated, or is it the RSI has changed?
Thanks in advance.
Quote from oraclewizard77:
Hi Jonny,
I noticed that you do in fact take losses, but I am not sure I understand the criteria for taking the loss.
Is it time based, for example after so many months, you will close out the trade?
Or since you mentioned that you use the software to take the loss, is it due to the pairs ratio no longer being correct ie positively corelated, or is it the RSI has changed?
Thanks in advance.
Quote from oraclewizard77:
I noticed that you do in fact take losses, but...
Re: Re: Re: Fundamental Problem With Pairs Trading...
Quote from tatankas:
I have these books, about PairTrading:
* McGraw-Hill,.The Complete Arbitrage Deskbook
* Statistical Arbitrage
* The_Handbook_of_Pairs_Trading
* Trading Pairs Capturing Profits And Hedging Risk With Statistical Arbitrage Strategies
*Wiley Finance,.Pairs Trading - Quantitative Methods and Analysis
Anyone knows any other books devoted to pair-trading?
Thanks
Open new trade this morning:
Short WLL 20.94, long PVA 8.74.
Ratio 2.4, target 2, mental stop 2.75.
Missed EFX:LNC, was not there yesterday at the close, lol.
Quote from total_keops:
Open new trade this morning:
Short WLL 20.94, long PVA 8.74.
Ratio 2.4, target 2, mental stop 2.75.
Missed EFX:LNC, was not there yesterday at the close, lol.
Closed out the DIA-SPY pair for a small profit. A winner is a winner even its a small one.
More pairs increases the likelyhood of profitability. $ neutrality key as carrying losing pairs if they have continued to perform in the prescribed manner i.e. price, spread etc.
New trade for me. Actually I like those corr. snap backs.
L: TOL 16.05
S: MTH 10.84
I don't trade pairs right now, but was thinking about looking into it in the future. I read through the thread, and one poster mentioned he had a 21 day stop loss. Although a very high win ratio, sometimes you will have a loss, and I want to determine what factors would lead to decide to take that loss since I don't wish to blow up my account. I did read once that one of the bright brothers went into one pair for over $ 1 million and held it for a very long time before it turned profitable including adding many layers, but I assume he had close to unlimited resources to do this.
Quote from total_keops:
Just to make sure...
Pairs are traded cash neutral, not 100 shares versus 100 shares.
For today's trade:
Long PDC @ 3.49
Short RDC @ 11.83
Assuming a 1000$ in each stock
1000/3.49 = 287 shares in PDC
1000/11.83 = 85 shares in RDC
Profit calculated accordingly. Maybe you had some losses that where wins?
Quote from total_keops:
Just to make sure...
Pairs are traded cash neutral, not 100 shares versus 100 shares.
For today's trade:
Long PDC @ 3.49
Short RDC @ 11.83
Assuming a 1000$ in each stock
1000/3.49 = 287 shares in PDC
1000/11.83 = 85 shares in RDC
Profit calculated accordingly. Maybe you had some losses that where wins?
Quote from tatankas:
Good luck total.
What are the ratio std-devs for this pair? Or you aren't using std-devs at all?
Best Regards
New trade for me.
L: ECA 38.13
S: NFX 21.26
Openned 2 new pairs before the close:
Long ELD.TO 9.30 (.TO for Toronto)
Short AU 31.90
Long FNFG 10.03
Short FMER 14.84
A sector play on technicals.
Passed EXC/XLU, did not like the risk/reward
Hi total_keops,
been curious and analyzed the pair with PTF. Got a signal as well. But do not trade financials these days. Nevertheless the trade looks good.
saico
nice trading guys, Im not finding that many good trade candidates at the moment, correlations seem to be breaking down across the board and it goes against my trading plan to take those signals.
On another note I just discovered how to enter cross-boarder pairs into pairtrade finder, normally you can't enter 2 stocks from different exchanges because we have to select a single exchange for each stock group, however if you setup a stock group, select NYSE as the exchange, then you can use the yahoo extensions when entering stock codes, for example, RIMM & RIM.TO, for the stock Research in Motion on both the NYSE and TSE, allowing us to do same stock arbitrage. There's quite a few of these pairs. Not sure if I would pair trade these though, most likely would need to hedge currency risk out. Il stick to pair trading stocks.
Exited two trades
Sold BAS @ 6.53
Covered HAL @ 16.26
Sold WLL @ 23.93
Covered PTEN @ 9.05
New trade
Long ETE @ 20.21
Short MGG @ 18.57
One new trade
Short EWW 26.26
Long EWG 14.18
Quote from jonnysharp:
Exited two trades
Sold BAS @ 6.53
Covered HAL @ 16.26
Sold WLL @ 23.93
Covered PTEN @ 9.05
New trade
Long ETE @ 20.21
Short MGG @ 18.57
__________________
HAVE STOP img src="http://www.enflow.com/p.gif" WILL TRADE
Quote from total_keops:
One new trade
Short EWW 26.26
Long EWG 14.18
Quote from EdgeHunter:
Nice Journal... Thanks Johnny...
Any thoughts on UPS - FDX...
Hey Jonny,
I have the same ver of PF as you, but I don't have a "plus/minus" chart.
How did you get that ?
regards
Ivan
I downloaded the latest version from www.pairtradefinder.com/freeTrial.php yesterday, they added that new feature a few days ago, if your on their mailing list they sent us a update, its a free upgrade. its basically charting the current standard deviations from the mean, pretty handy to see current divergences against historical ones. also im seeing you can hold onto pair trades a bit longer or shorter, or scale in and out based on the stdev reading, like for example you could scale into a pair at -2.00 stdev, add another layer at -2.30 , then maybe scale out at -0.50 and +0.50 with a 10 day time stop, just some ideas im currently looking at...
Thanks mate, I am on their list but didn't get an email for some reason.
Looks like to forgot to step the rev then as your new ver is same as my old
I'll download it now
Ivan
IMO pair trading comparing unrelated stock, or almost any stock, seems too much effort very little reward, somewhat gimmicky. I'd rather see stock divergence compared to an ETF or underlying index opposed to another stock. But I'll observe these trades nevertheless.
Quote from NevouS:
IMO pair trading comparing unrelated stock, or almost any stock, seems too much effort very little reward, somewhat gimmicky. I'd rather see stock divergence compared to an ETF or underlying index opposed to another stock. But I'll observe these trades nevertheless.
Sold FMX @ 24.44
Covered ABV @ 44
Sold CVO @ 2.07
Covered NP @ 3.66
New trade
Long BEBE @ 5.21
Short UA @ 16.14
Johnny,
updating to the new version scrambled my value adjustments a bit. What value do you have for ''Volatility Standart Deviation Lookback'', please?
Much thanks in advance!
saico
Quote from jonnysharp:
...they added that new feature a few days ago... its basically charting the current standard deviations from the mean, pretty handy to see current divergences against historical ones...
Quote from NevouS:
IMO pair trading comparing unrelated stock, or almost any stock, seems too much effort very little reward, somewhat gimmicky. I'd rather see stock divergence compared to an ETF or underlying index opposed to another stock. But I'll observe these trades nevertheless.
Quote from jonnysharp:
I don't see how trading a stock against another stock is more work than a stock against a ETF, and according to numerous backtests ive done, stock vs stock pairs are significantly more profitable than stock vs ETF or ETF vs ETF pairs.
Quote from saico:
Johnny,
updating to the new version scrambled my value adjustments a bit. What value do you have for ''Volatility Standart Deviation Lookback'', please?
Much thanks in advance!
saico
Quote from total_keops:
Geez, did they take the idea from my chart?
Quote from NevouS:
Here is my rationality. Why should two random stock, with some sort of divergence flag, follow thru and meet expectations?
Opposed to IBM under performing GE (forgetting about news sensitivity) and using divergance this way because they are linked to the DJIA and once there is a flag for IBM, then IBM should play catch up.
I just see picking two random stocks do not give a trading edge unless they are related by index or industry at the least.
Some people really scorn pair trading while others praise the @#$% out of it but this thread should shine some light hopefully in either case.
Quote from jonnysharp:
Who said anything about pair trading random stocks? as stated numerous times all throughout this journal we only trade pairs where both stocks are in the same industry.
Ratio used in Pair trade finder software
If any one knows then please tell me
about the ration used in Pair trade.
u can hv the data sheet when u run "back tester" and click option "View data"after selecting a pair.
there is a colam of Ratio i realy want to know about it.
if any one knows reply me as early as possible
also i hv attached sheet please go through it.
__________________
dev
ratio is just the left stock divided by the right stock.
Ratio in pair trade
Its not just left diveded right.
please do through the sheet that i hv attached in privious MSG.
and reply me
__________________
dev
Im not sure, you will have to email them.
Ratio in pair trade
Can u tell me in this sheet how they hv found This ratio?
__________________
dev
Re: Ratio in pair trade
Quote from dev2606:
Can u tell me in this sheet how they hv found This ratio?
Ratio used in Pair trade finder software
Stock are NTPC and Powergrid.
Data sheet is attached in previous MSG
__________________
dev
Ratio used in Pair trade finder software
Mr jonny
can u give me clarification about ratio found in pair trade finder. u will hc sheet as follow,
go in "back tester" then select pair-- then click on active option "View data".
then u will hv data sheet in which there is a column of Ratio. plz tel me how they found that ratio.
i am doing Project on pair trading so i need clarification badly.
also i am attaching one sheet here it self.
so plz try to solve my problem i am thank full 2 .
__________________
dev
dev, let me say this again, im not sure, you will have to email them.
latest performance update?/
do you have spreadsheet with your trades
showing the performance since inception?
be nice to have.. thanx bro
Exited 3 trades;
Sold CTX @ 6.89
Covered KBH @ 10.17
Sold ABG @ 2.82
Covered GPI @ 10.63
Sold PQ @ 2.45
Covered ROSE @ 4.51
Busy week so far in pairs. Exited the MTH-TOL trade with both legs in profit.
Sold TOL @ 16.45
Covered MTH @ 10.84
All red on my side (3 opened), lol.
2 new trades
Long MT: 17.10$
Short TS: 18.83$
Will cut it fast if it dosen't work.
Long ITW: 27.29$
Short SWK: 28.38$
5 openned trades on red
Why the big loss on BAS/HAL?
Quote from jonnysharp:
01/12/2009
2 new trades;
Long BAS @ 10.80
Short HAL @ 17.93
Long ETE @ 17.47
Short MGG @ 16.16
Quote from total_keops:
Openned 2 new pairs before the close:
Long ELD.TO 9.30 (.TO for Toronto)
Short AU 31.90
Re: Why the big loss on BAS/HAL?
Quote from waltbx:
BAS/HAL ended up being one of your largest losses. I've studied the chart you attached to the January post, and studied my graphs of the pair, I've checked the news for the pairs back in January, and I cannot see why the trade should not have been taken. (Except that historically, this pair has returned less than $85/trade).
One item, on January 13, BAS reported "selected operating data for Dec 2008." The stock price did not seem to be affected, yet from then on BAS - HAL divergence grew. I lost big on one paper trade because I did not check when earnings were to be reported and the report the day after I entered the trade caused 1/2 of the pair to go bad. Could this be what happened?
Have you any insights in retrospect? Would you take that same trade again?
WB
Quote from total_keops:
"Paulson Buys AngloGold Stake"
Thanks man, I appreciate.
Quote from jonnysharp:
Paulson buying in is probably what caused the divergence, it may pop some more wednesday, but could be shortlived as it will mostly be daytraders unless he keeps buying. did you currency hedge this trade?
Re: Re: Why the big loss on BAS/HAL?
Quote from jonnysharp:
Ive discovered there is correlation between trade length and profitibility, the best trades are the shortest in length and the worst trades are the longest, im trying to incorprate this fact into my trading plan.
Re: Re: Re: Why the big loss on BAS/HAL?
Lazy, yes if you downloaded the latest update of pt finder, they have a +/- column in the console and chart in the analysis window which you can use to scale out before an exit signal, like if you enter a pair at -2.20 stdevs, you could exit when it goes above -1.00, trade length reduces dramatically, also win rate would pickup too, avg win would probably decrease a little, something im looking into.
Yeah ive looked at similar things for pairs currently in trade, i decided to steer away from those because like we have noticed trades that don't work out straight away tend to not be the most profitable, I would take notice if a pair currently in trade went 3+ stdevs from the mean on non-specific stock news, that would be a awesome trade setup I think.
exited trade
Sold ATN @ 10.78
Covered RIG @ 59.30
new trade entered on wednesday
Long PUK @ 7.63
Short AXA @ 11.72
I was reading a research paper on pairs trading and it stated that pairs that diverged on industry news as opposed to stock specific news tended to converge much quicker. The theory behind this was the lead-lag affect between two similar stocks, each stock may have different institutional holders that may digest & act on information differently, plus liquidity constraints may not allow one stock to be priced in the same timely manner as another, whereas stock specific news that heavily affects the stock tends to have a more persistent divergence as a fundamental re-pricing may be warranted.
Johny,
Can you share that study, please?
Thanks.
no problem.
Unloaded the whole portfolio this morning. I was down at an uncomfortable level and I had the opportunity to get some at a profit and some at a loss so I covered for a loss on the whole protfolio.
Sold ELD.TO 10.63$
Bought AU 37.82$
-5.7%
Sold FNFG 11.01$
Bought FMER 17.86$
Worst one, a sector play that turned not to be a good idea.
-11.86%
Bought EWW 27.93$
Sold EWG 15.39$
+1.56%
Sold MT 19.12$
Bought TS 19.77$
+6.11%
Sold ITW 28.69$
Bought SWK 29.60$
+0.09%
All % after fees. They are still considerale for the size I play but I dont care, I learn.
What were the mistakes, keop?
Sold RAIL @ 17.15
Covered CP @ 30.50
Sold CBM @ 2.22
Covered OMPI @ 5.58
Quote from tatankas:
What were the mistakes, keops?
Hi Keops,
Do you think that you would have been profitable overall if you traded for the divergence, instead of the convergence (mean reversion)? In other words, buy the strong stock & sell the weak stock after they seem to begin the pattern of divergence from each other.
thanks,
Walt
Quote from jones247:
...Do you think that you would have been profitable overall if you traded for the divergence, instead of the convergence (mean reversion)?...
keops, I remember you saying you don't use pairtrade finder and you programmed your own screener, may I ask how you are determining your entries and exits?
Hi Jonny,
Many thanks for this thread, it's very inspirational. A couple of questions, if you don't mind:
1.
Quote from jonnysharp:
Yes pairs trading is ideal for prop accounts, CFDs or portfolio margin.
Quote from jonnysharp:
keops, I remember you saying you don't use pairtrade finder and you programmed your own screener, may I ask how you are determining your entries and exits?
Excellent thread, thank you guys for doing this!
Does anyone know if there's software out there that would allow me to trade pairs with IB or TS? I'm mainly interested in placing limit or stop orders based on the combined price of the pair. TIA.
__________________
Happy here and now!
L: LULU @6.35
S: HBI @8.95
Worked well for me couple days ago, so lets try it again.
I know there is something I dont get. Can someone point to me what it is? Dividend, rebalancement... ?
Short: IVV @ 77.89
Long: SPY @ 77.16
I know there must be something wrong but took it for the sake of knowledge. Nothing else interesting on my side.
The Spy's just went ex-div today in the amount of 56 cents. That may explain some of the difference.
Quote from total_keops:
I know there is something I dont get. Can someone point to me what it is? Dividend, rebalancement... ?
Short: IVV @ 77.89
Long: SPY @ 77.16
I know there must be something wrong but took it for the sake of knowledge. Nothing else interesting on my side.
Quote from Don87109:
The Spy's just went ex-div today in the amount of 56 cents. That may explain some of the difference.
Quote from Yannis:
Excellent thread, thank you guys for doing this!
Does anyone know if there's software out there that would allow me to trade pairs with IB or TS? I'm mainly interested in placing limit or stop orders based on the combined price of the pair. TIA.
Sold ETE @ 20.15
Covered MGG @ 17.54
Thought Id try something different today and I placed an cross boarder pair trade, same stock arbitrage between New York and Toronto.
Long SU(TSX) @ 30.90
Short SU(NYSE) @ 25.29
Currency hedge in place -> long USD/CAD @ 1.2392
Current spread implies FX rate of 1.2218, 174 pips out of whack.
After doing alot of work with a programmer over the last several weeks trying to code up a system using MS/TradeSim, Iv decided that the easiest and most cost-effective way to trade pairs is to in fact buy this software.
I'll still do the research on pairs myself, but once I have the pairs I will backtest and look for entries/exits using the software. Free EOD data for all those exchanges with automatic updates saves heaps of $ and time.
Jonny, good to still your still doing well.
Can anyone tell me just how good the backtester feature is on pairtrade finder?
Can you at least backtest at the portfolio level?
Eg. If I invest $100k over the following pairs from 01-01-2006 until 31-12-2007 what is the return? drawdown? win%? average win/average loss? sharpe? equity curve?
Can you set the backtester to only test between certain dates?
Thanks.
yes i tryed to construct a pair trading system in excel and it ended up being very messy and time wasting, pt finder has been the best couple hundred dollars ive spent in my trading career as everyone can see in the journal. every professional trader i talk to uses some sort of specialist software to trade with, spreadsheets are for amateurs ive learnt.
the backtesting feature is pretty basic and gives the average correlation for the backtested period, number of trades, total PnL, avg PnL per trade, you can export the results into excel where there is a running PnL column of each pair and you can collate different pairs together to construct a portfolio equity chart, however they still have a way to go with the backtesting and its something ive suggested to them and I know others have in their pair trading forum aswell, they did get back to me and say the backtesting feature is being enhanced in version 3, due out later this year, im really looking forward to testing different money management strategies using the layers and possible scaled out exits according to the +/- stdev reading, also testing time based stops is something i suggested to them too.
But as with every trading system, is not about optimizing every last parameter, its about doing what is logical, practical and keeping a diversified portfolio of different pairs from different industries is as good as form of insurance as any other.
Pairtrade Finder does not give you a backtest of a full portfolio, nor for a date range. At least not in a summary form. You can though export for each pair an excel spreadsheet with all trade details. I presume a Virtual Basic or database programmer could extract detailed portfolio backtest info out of the spreadsheets.
I do think Paritrade Finder is worth the investment. It is doing things other pieces of software do not do. At the same time I do wish for a number of improvements, and portfolio backtest is one of them.
Quote from jonnysharp:
I know IB offer combo orders as such, other than that, execution is done manually, and its an area i want to start focusing more on, that is trading like a market maker, placing bids and offers inside the spread and offering liquidity instead of taking it.
Quote from jonnysharp:
....also testing time based stops is something i suggested to them too.
Quote from thetrendfollowe:
After doing alot of work with a programmer over the last several weeks trying to code up a system using MS/TradeSim, Iv decided that the easiest and most cost-effective way to trade pairs is to in fact buy this software ...
Quote from Yannis:
...
Does anyone know if there's software out there that would allow me to trade pairs with IB or TS? I'm mainly interested in placing limit or stop orders based on the combined price of the pair. TIA.
For Bright traders, zoetrading.com seems to have an interesting solution, but I'm not in that group.
__________________
Happy here and now!
I was dollar neutral on my pairs today and lost my shirt. I didnt have any financial stocks in my pairs. I did hold them hoping they come back in down the road
a few pair questions I have (newbie with pair trading)
1. with pairs and profit targets, when do feel you hit your profit target? what is a figure or formula one uses with pairs for profit?
2. when exiting pairs, do you do an M.O.C or get out when you hit your profit target?
3. In the morning when putting on pairs, I like to do it about 20 or 30 minutes after opening, what time of the day are people starting to put pairs on?
4. how does one handle news on pairs? assume Im in ED/SO and news comes out for one of the tickers, (assume the news will go against you, how do you play it or just suck it up?)
5. do you guys look at the beta of pair?
thanks again!
Quote from jonnysharp:
yes i tryed to construct a pair trading system in excel and it ended up being very messy and time wasting, pt finder has been the best couple hundred dollars ive spent in my trading career as everyone can see in the journal. every professional trader i talk to uses some sort of specialist software to trade with, spreadsheets are for amateurs ive learnt.
Quote from jonnysharp:
yes i tryed to construct a pair trading system in excel and it ended up being very messy and time wasting, pt finder has been the best couple hundred dollars ive spent in my trading career as everyone can see in the journal. every professional trader i talk to uses some sort of specialist software to trade with, spreadsheets are for amateurs ive learnt.
.
Quote from NYC212:
do you have a link for this?
I couldn't remember what that acronym meant -- so I googled it
Quote from total_keops: JFGI...
__________________
Happy here and now!
Quote from yobo:
Oh man Johnny, you hurt my feelings. I have a great excel spreadsheet to analyze pairs and generate alerts. My spread sheet does everything Pairtrade finder does and probably a few things it doesn't do.
Just like that it comes back so quickly, today just closed 2 of my best trades for significant profits, portfolio at an all time high. I continue to build trust and faith in the pair trading strategy and the trading system Im using.
Sold BEBE @ 6.23
Covered UA @ 16.33
Sold PUK @ 10.15 (went long this stock at 7.63 last week!)
Covered AXA @ 12.67
New trade:
Long BKI @ 2.18
Short IP @ 9.20
Quote from Yannis:
I couldn't remember what that acronym meant -- so I googled it
Quote from jonnysharp:
.... pt finder has been the best couple hundred dollars ive spent in my trading career as everyone can see in the journal. every professional trader i talk to uses some sort of specialist software to trade with, spreadsheets are for amateurs ive learnt.
the backtesting feature is pretty basic and gives the average correlation for the backtested period, number of trades, total PnL, avg PnL per trade, you can export the results into excel where there is a running PnL column of each pair and you can collate different pairs together to construct a portfolio equity chart.....
Quote from Angelo_60:
a) is it able to read a Metastock formatted database, or it is pretty much necessary to download data from yahoo??
b) what are the "imput data" for the "intraday spread chart" shown here (bottom of the page):
http://www.pairtradefinder.com/overview.php
c) I've not completely get Jonny's pointing out: "you can collate different spread togheter".... the example posted here (bottom of the page, 20 pairs, 175 trades taken and about 65k of theorethical profit)
http://www.pairtradefinder.com/tradeExample.php
is it just a sum of 20 single pair backtests???
Thanks in advance.
Loosing confidence in Pair Trade Finder
I'm using Pair Trade Finder Version 2.50727. I paper traded before trading for real starting March 5. I've made 21 pair trades of $2500 each side ($5000 total each pair) and my profit is $4004, in 14 trading days. It feels pretty good to finally be profitable in the stock market.
I now have a serious confidence problem with the software. Many of my ratio graphs skip LARGE periods of days. To confirm, in preferences, I set the Pair Watching Chart Options for the Ratio to 20 days, and then to 10 days, and called up Ratio Charts for 9 pairs. Over half of them skipped many days. On two 10 day charts, the graphs were straight lines, showing only first and last points, skipping all days in between. On several 20 day charts, the days shown are: 9, 10, 11, 12, 16, and 26. Missing are 13, 17, 18, 19, 20, 23, 24, and 26. This GREATLY skews the graph and distorts the Moving Average. This occurs on many graphs and for many Ratio periods, not just 20 and 10 days (I chose those to try to force the software to choose days that were missing in longer period charts.) With out reliable charts, I'm now loosing confidence in the software giving me reliable data to make decisions. Is there work being done to correct this problem?
Walt B
Re: Loosing confidence in Pair Trade Finder
Quote from waltbx:
I'm using Pair Trade Finder Version 2.50727. I paper traded before trading for real starting March 5. I've made 21 pair trades of $2500 each side ($5000 total each pair) and my profit is $4004, in 14 trading days. It feels pretty good to finally be profitable in the stock market.
I now have a serious confidence problem with the software. Many of my ratio graphs skip LARGE periods of days. To confirm, in preferences, I set the Pair Watching Chart Options for the Ratio to 20 days, and then to 10 days, and called up Ratio Charts for 9 pairs. Over half of them skipped many days. On two 10 day charts, the graphs were straight lines, showing only first and last points, skipping all days in between. On several 20 day charts, the days shown are: 9, 10, 11, 12, 16, and 26. Missing are 13, 17, 18, 19, 20, 23, 24, and 26. This GREATLY skews the graph and distorts the Moving Average. This occurs on many graphs and for many Ratio periods, not just 20 and 10 days (I chose those to try to force the software to choose days that were missing in longer period charts.) With out reliable charts, I'm now loosing confidence in the software giving me reliable data to make decisions. Is there work being done to correct this problem?
Walt B
Re: Loosing confidence in Pair Trade Finder
Quote from waltbx:
I'm using Pair Trade Finder Version 2.50727. I paper traded before trading for real starting March 5. I've made 21 pair trades of $2500 each side ($5000 total each pair) and my profit is $4004, in 14 trading days. It feels pretty good to finally be profitable in the stock market.
I now have a serious confidence problem with the software. Many of my ratio graphs skip LARGE periods of days. To confirm, in preferences, I set the Pair Watching Chart Options for the Ratio to 20 days, and then to 10 days, and called up Ratio Charts for 9 pairs. Over half of them skipped many days. On two 10 day charts, the graphs were straight lines, showing only first and last points, skipping all days in between. On several 20 day charts, the days shown are: 9, 10, 11, 12, 16, and 26. Missing are 13, 17, 18, 19, 20, 23, 24, and 26. This GREATLY skews the graph and distorts the Moving Average. This occurs on many graphs and for many Ratio periods, not just 20 and 10 days (I chose those to try to force the software to choose days that were missing in longer period charts.) With out reliable charts, I'm now loosing confidence in the software giving me reliable data to make decisions. Is there work being done to correct this problem?
Walt B
__________________
Profits are a byproduct of proper risk management.
Re: Re: Loosing confidence in Pair Trade Finder
Quote from jonnysharp:
Walt, those are some great results for such small trade size, congrats.
regarding missing days in ratio chart, you will have to contact them for help, Im sure they will fix you straight away, you may just need a database refresh, I do know however that data in the charts and data computed in the formulas are different so It won't affect your signals, you must be doing something right to get the huge return that you have in such short time.
Re: Re: Loosing confidence in Pair Trade Finder
Quote from NKNY:
What are your trade settings set at in pairtradefinder and What do you look at when taking one trade over another.
Thanks
Nick
Hello Walt,
you made great points especially on how to read the ratio chart and determine the trade quality. I have to admit, that I neglected that in the past. I also had great results but these got reduced by some very view bad trades. After reviewing them I found out, that all had terrible looking ratio charts. As you said before, the ratio should not be trending and should not be found in a small range. Taking trades with a ratio that meets the points I just mentioned plus that resists atleast in the upper 3rd of its recent 150 days trading range seems to be optimal.
What exactely do you mean with the ''Ratio Mean''? Is that the ratio MA for you? If not how do you determine that?
Regarding the backtest results dollar wise I tend to disagree, Walt. Because the PTF takes all trades within the backtest period. Regardless of a trending, or not trending ratio, regardless of a correlation of 20%, or 90%. I had same great results with pairs that contained stocks that had major news, or other big events during the testing period. So I think you should take those numbers with a grain of salt. Besides the points being made of course I also would prefer a pair with good numbers rather than the ones with a low average return.
Keep up the good work!
saico
Data Issues for Pair Trader
I am incredibly thankful for this thread.
I too have started trading on a small scale but so far have 37 trade (real money, small size) and so far so good. With no stops my average win/loss is 70/30. This compares to about 65/35 from what I can tell from Johnny's trades; although interestingly we almost never trade the same things. Unfortunately my win per trade vs loss per trade is worse (assuming i close out two old ones at a loss) where my losses are currently about 1:5 times larger than my wins, where Johnny's are in the range of 1:1 from what I can tell. Still profitable but either not lucky or not as good at Johnny at picking them ....
Anyway a few comments. I have purchased pairtradefinder and I use it to review each trade before I make it. But I found it too unreliable to be my only/main source of data so far. I too have found missing/inconsistant data. If you click on the pair and right click on "refresh prices" before "analyse pair" it seems to help. So i click on "refresh prices" each time before going into "analyse pair."
When I spoke with them they said it was because I had too many pairs (something like 1000 in there) and that I was overwhelming the system (essentially). I know that many of my pairs have shorter term low correlation so i could remove them but havn't had the time. So the other thing you can try is keep your pairs to 200 or so (which is what they suggest).
I have also created my own versoin with similar settings in AmiBroker which is my main source for review and monitoring. It took a few workarounds since AmiBroker isn't really set up for it but it is much easier / reliable for me to scan given the data issues. But even with the workarounds it is a zillion times faster for me to look at and monitor my pairs. I typically scan for pairs then if I like one (I have similar charts created) I go into pairtrader and confirm the chart looks about right and i confirm the signal.
So...to try to deal with the data issues (a) try to keep your active pair list low and (b) hit refresh prices on a pair before bringing that pair up. I think pairtradefinder is useful but still a bit rough around the edges.
Hope that helps.
Mike
Quote from saico:
Hello Walt,
What exactely do you mean with the ''Ratio Mean''? Is that the ratio MA for you? If not how do you determine that?
Quote from saico:
Regarding the backtest results dollar wise I tend to disagree, Walt. Because the PTF takes all trades within the backtest period. Regardless of a trending, or not trending ratio, regardless of a correlation of 20%, or 90%.
Quote from saico:
I had same great results with pairs that contained stocks that had major news, or other big events during the testing period. So I think you should take those numbers with a grain of salt. Besides the points being made of course I also would prefer a pair with good numbers rather than the ones with a low average return.
Keep up the good work!
saico
Re: Data Issues for Pair Trader
Quote from mlsignups:
I am incredibly thankful for this thread.
So...to try to deal with the data issues (a) try to keep your active pair list low and (b) hit refresh prices on a pair before bringing that pair up. I think pairtradefinder is useful but still a bit rough around the edges.
Hope that helps.
Mike
Thanks Walt!
Would you mind sharing how many sectors you currently have in your PTF and the number of pairs per sector?
saico
Hi Walt,
Thanks for sharing your experiences. Impressive start.
It's funny, but when I first started I had broad sectors and ran correlation and the pairs worked great. Now that I have switched to industry specific they don't seem to work as well.
Also, I didn't use the high average profit as a filter based on what PT Finder said, but I am rethinking it after what you said and knowing Jonny did the same.
Finally, I had two pairs today that I closed out at no profit. I checked them and the level was zero, i.e., they no longer met the standard deviation requirement. However, they never gave an exit signal. After I closed them it dawned on me that I shouldn't have closed them. That's the first time that has happened to me. Every other time they have gone directly to an exit flag. I guess I learned something today if I considered this correctly.
Quote from saico:
Thanks Walt!
Would you mind sharing how many sectors you currently have in your PTF and the number of pairs per sector?
saico
I have been monitoring this thread lightly, I was curious if anyone has begun trading pairs on an intraday basis. My testing has shown that this is not profitable but I freely admit that the testing was not done rigorously enough to draw any conclusions. Look forward to hearing some responses.
walt, great to see your've done your work, studied my trades, taken it a step further and thought outside the box, all the qualities of a great trader. you've made a few good points that have made me think.
with regards to a pair backtesting well, its a valid argument you present and I agree with, however remember to make sure with a backtest the pair didn't generate the majority of its profit from one trade, rather even dispersed across all trades. i like you point with measureing the % difference between ratio and avg ratio, a step further would be to divide this number by the pair volatility, for eg a 5% divergence on a pair with volatility of 2% is more significant of pair with a 8% divergence with volatility of 5%, so divergence % relative to volatility %. maybe we can mention to them to incorporate this reading into the console. I don't use the RSI too much anymore, I like a strong divergence, Ive actually been using the spread chart more, like to see it a 50day highs/lows and fade that direction if the signal coincides. glad ive been of help to you and thanks for sharing your method.
I had been trading pairs on my own apart from this thread and noticed it recently. Thought I would throw my two cents in since everyone is sharing ideas. One thing that has helped me in timing entries and exits (I do not use the software discussed here) is when I have a good pair with good correlation, I programmed Thinkorswim to chart the ratio of the pair and then I slapped a long-term Bollinger Band indicator over it with about 60 day moving average and plus or minus 2 standard deviations.
When the ratio goes outside the bands I fade the pair and it has worked out well for me. (Do not have statistics but on actual trades and backtested trades it continues to work well.
The primary key is having a good list of pairs which is the research part. This is where the individual skill really comes in and what factors you use to keep or disregard a pair. I cannot scan so I manually check my pairs for signals which does not take that long but I found this to work well. Took a while to program it but I get a great visual when to enter and when to exit if you are familiar with BBs
Re: Re: Re: Loosing confidence in Pair Trade Finder
Quote from waltbx:
Here is what I did. I'm grateful for the guys who know much more than I do for sharing. I learned from them, especially Jonny.
I have read each and every one of the posts listed in this journal, and copied notes into a word processer to use as a training guide. I'm treating it as a business and am being very serious about it. I ask questions on the forum after I have worked unsuccessfully to find my answer.
My Pair Trade Finder settings are the default settings, except my trade size setting is $2500 (Long+Short = $5000 total). My account size was a little larger than $25K now up to almost $30K, and I use the margin provided by my broker, IB. I have my layers set to 2.00, 2.20, 2,40, etc.
I studied the graphs of the trades Jonny put on, and studied his loosers. What was the commonality in the big losses? What did the graphs show that was in common in the losses?
To find Jonny's spreadsheet of his trades, go through the posts to find where he posted his Excel spreadsheet. Study his trades, and look up the graphs in Pair Trade Finder. As Jonny posts his trades in this Journal, I put each of them in the spreadsheet. I study the losses.
Some thoughts on what pairs to choose. Some people on this thread have said they aren't concerned much about the past profit history of specific pairs. I don't agree. (Keep in mind that many of them have much more experience than I have, and you should weigh their advice heavier than mine.) It is my belief that if we are to look historically at correlation of stocks in a pair, it is equally valid to look at profit history of the pair. After all, profit is why I'm in the game. If I have a choice between a pair averaging $35 profit over the past year, and one averaging $200, I'll choose the $200 pair. So I load my stocks, then PT finds all the pairs, and I choose the ones averaging $200 or more and with a correlation of 60% or better. My trade size is $2500 so if you go with a $10,000 trade size, you would look for pairs with an average profit 4x larger, or $800 or more. I don't tie my money up with smaller potential profit.
When I discovered what I think is the key to knowing if a good pair will bring a profit today, I was ecstatic. I was looking at Jonny's trades and studying the graphs. You must do this. It will sink in better if you do this yourself, I believe. I saw the correlation between his loosing trades and the graph for those pairs. Most of them were trending pairs.
Remember, that to be profitable, the ratio must drop below where it is today (that is if the ratio is above the mean today -- or go up if below the mean). And remember too, that this is called Mean Reversion pair trading. We look for pairs with ratios that have diverged from the mean, and we are expecting the ratio to revert back to the mean. But if, while we wait, the ratio continues to rise, over days it will drag the mean up with it. Losses occur when the daily ratio finally meets the mean, but does it above the entry ratio. So, the key is to study the Ratio Chart and pass on those pairs where the ratios have little chance of meeting the Mean Average line at a point where profit can be made. ie: don't trade pairs with strong trending graphs. Don't bother with "iffy" pairs.
Do not fail to check for news. Any news that affects one stock in the pair, but not the other is problematic. Earning's reports coming in the next two weeks are a possible problem.
I use a spread sheet to calculate an estimated profit % using the present ratio and my conservative estimate of where the ratio will be when it meets the Mean, determined from the ratio chart in PT. I choose only those pairs with an potential profit of 5% or more. I use this formula: (Expected ratio less today's ratio) / (today's ratio) x 0.5 as a percentage. This has been VERY helpful in making choices. Some pairs that have enter-the-trade signals have had potentials of 10%, some less than 1%.
Before I get a signal to close, I'll set a stop loss to protect profits if one side is showing good profit. I'd rather take a good present profit, than risk losing it for possible future gain. Perhaps I'm wrong. When I get a signal to close the trade, I'll close out the losing side, but let the profitable side run, keeping a trailing stop loss to protect my profits.
Jonny spends an hour studying the pairs, and trades once a day, at closing. I'm excited and having fun, so I spend my morning (I'm on the west coast USA) at the computer studying the trades and playing the "game." Personal choice. Eventually, I'll probably shift to what Jonny is doing, and do other things with my day.
I haven't tried to factor RSI into the mix. Maybe someone with experience can tell me how RSI has been important to them. I haven't factored in spread either. I'd guess that if the spread were decreasing, that would be a good sign.
Works for me. So far.
Walt B
__________________
Profits are a byproduct of proper risk management.
Quote from jonnysharp:
walt, great to see your've done your work, studied my trades, taken it a step further and thought outside the box, all the qualities of a great trader. you've made a few good points that have made me think.
with regards to a pair backtesting well, its a valid argument you present and I agree with, however remember to make sure with a backtest the pair didn't generate the majority of its profit from one trade, rather even dispersed across all trades. i like you point with measureing the % difference between ratio and avg ratio, a step further would be to divide this number by the pair volatility, for eg a 5% divergence on a pair with volatility of 2% is more significant of pair with a 8% divergence with volatility of 5%, so divergence % relative to volatility %. maybe we can mention to them to incorporate this reading into the console. I don't use the RSI too much anymore, I like a strong divergence, Ive actually been using the spread chart more, like to see it a 50day highs/lows and fade that direction if the signal coincides. glad ive been of help to you and thanks for sharing your method.
sectors?
Quote from waltbx:
I haven't counted my pairs before and did today. I have about 250 pairs, about 550 stocks, and about 36 sectors if I ignore the sectors with only 2 or 3 stocks. The number of pairs per sector varies from 1 or 2 to 40 pairs in Asset Management, which is a new sector I'm exploring. Each pair has a good profit history, others I ignore.
Walt B
dividends
To anyone actively using pairs strategy, how do you guys go about handling dividends, in regards to the short end of the pair?
Re: sectors?
Quote from Appleseed:
Is that sectors or industries?
cheers
john
Quote from jonnysharp:
walt, great to see your've done your work, studied my trades, taken it a step further and thought outside the box, all the qualities of a great trader. you've made a few good points that have made me think.
Quote from jonnysharp:
with regards to a pair backtesting well, its a valid argument you present and I agree with, however remember to make sure with a backtest the pair didn't generate the majority of its profit from one trade, rather even dispersed across all trades. i like your point with measureing the % difference between ratio and avg ratio, a step further would be to divide this number by the pair volatility, for eg a 5% divergence on a pair with volatility of 2% is more significant of pair with a 8% divergence with volatility of 5%, so divergence % relative to volatility %. maybe we can mention to them to incorporate this reading into the console. I don't use the RSI too much anymore, I like a strong divergence, Ive actually been using the spread chart more, like to see it a 50day highs/lows and fade that direction if the signal coincides. glad ive been of help to you and thanks for sharing your method.
Quote from waltbx:
One large loss was a short on BARC (Barclay), a financial. The day after I sold it short, good news came out, and I cut my loss at $800 (on $2500 investment). I learned to stay away from financials, as someone posted earlier on this thresd. I ignored the advice. Financials have too much possibility for individual stocks to issue good or bad news in this climate.
Quote from waltbx:
Thanks for this, Jonny. I'll try to put it into practice. I'll add it to by worksheet spreadsheet.
I don't understand what you mean by "fade that direction."
Also Saico's tip about avoiding pairs that resist going into the top 1/3. "...that resists at least in the upper 3rd of its recent 150 days trading range seems to be optimal. " But Saico, I'm not clear on what you mean by the top 1/3 of the recent 150 days trading range. Could you be more specific?
Walt B
Change
Curious, has anyone tested different settings on the lookback periods... IE, what happens if ratio lookback 14, stretch 14 are set to 20. Wont extending the lookback smooth out the ratio moving average and produce less trades.
Nick
__________________
Profits are a byproduct of proper risk management.
Quote from saico:
Hi Walt,
I was actually refering to a kind of overbought/oversold scenario. But found out over the weekend that this has no validation for the ratio chart. Sorry for making things that complicated.
But nevertheless I did another major change. I scanned my sectors completely new and filtered pairs as you mentioned couple days ago. Here are my filter criterias.
- I only took pairs with stocks that are in the same sector. ( 1 small excemption was some pairs with tech stocks.)
- Average correlation atleast 65%
- Minimum profit average per trade 800 USD (Assuming 10k per side)
- Consistent profitable trades around the profit average. Very view and small losers (1-2) during the backtest period of 365 days.
- Stock price >5 USD.
The result was that I got around 50 top high quality pairs. Thats more than enough for me and my account.
By the way I dont mind sharing these pairs even its been kinda hard work to filter them out. But I owe this thread a lot and therefore I dont care to give something back. All who are interested may pm me.
Saico
FYI a couple of trades Friday and Today (Monday). I won't clutter Jonny's journal with my trades, but someone thought my use of expected ratio and expected profit was interesting.
My trade size is $2500 each side.
A pair entered Friday:
Long CS @ 30
Short LYG @ 4.29
Ratio 7 Expected ratio 9.51 for a profit of 9%
Closed CS today (without a signal from PTF) at 27.83 for a loss of $185. Letting LYG run with trailing stop loss, currently a profit of $400.
A pair entered today:
Short CCO @ 3.31
Long HHS @5.38.
Ratio: 0.615. Expected ratio 0.560 for profit of 4.5%
Walt B
Quote from waltbx:
FYI a couple of trades Friday and Today (Monday). I won't clutter Jonny's journal with my trades, but someone thought my use of expected ratio and expected profit was interesting.
My trade size is $2500 each side.
A pair entered Friday:
Long CS @ 30
Short LYG @ 4.29
Ratio 7 Expected ratio 9.51 for a profit of 9%
Closed CS today (without a signal from PTF) at 27.83 for a loss of $185. Letting LYG run with trailing stop loss, currently a profit of $400.
A pair entered today:
Short CCO @ 3.31
Long HHS @5.38.
Ratio: 0.615. Expected ratio 0.560 for profit of 4.5%
Walt B
Quote from Ivan:
HI Walt and Johnny,
thanks for the continual great info.
Just wanted to say Walt that I too am having some problem with PF regarding false signals, negative correl and a few other things. I've made Jared aware of them so hopefully he is working away at them. I've been trading with PF recently but it seems to have all fallen in a heap, so I have to analyse what I'm doing wrong.
One thing I was trying to assess was cutting the losing leg and letting the winning leg run a bit which I think Walt is what you were doing in your last trade. But, I'm not able to easily backtest this. I'll keep plugging away, but I must admit my confidence has taken a bit of a hit !
regards
Ivan
Quote from Ivan:
One thing I was trying to assess was cutting the losing leg and letting the winning leg run a bit which I think Walt is what you were doing in your last trade. But, I'm not able to easily backtest this. I'll keep plugging away, but I must admit my confidence has taken a bit of a hit !
regards
Ivan
Thanks Walt !
I'll download it and give it a try, it might clean up some of my other problems I'm having. I've always wondered if there was some dbase "housekeeping" that was required as the thing just seems to get sluggish over time. I've actually split my pairs over 2 PC's to try and keep it lively
regards
Ivan
Quote from knocks420:
Just wanted to bump my question regarding intra-day pairs trading, anyone currently doing or thinking of doing so?
Quote from yobo:
Oh man, now you are beginning to scare me. Not just you johnny but everyone else too with all this analisys. This divided by that and that divided by this. Oh man let's keep this simple.
Buy low sell high. If you are gonna look at one chart for a decision look at the pair ratio chart and how it behaves around the mean. If you have a wavy pattern, awesome, if not and the ratio looks like it has a strong trend stay away or just trade the trend.
Thousands of trades later, I finally learned. This is a simple game to play. Just have to keep the rules simple.
Also much easier on the psycie.
Re: dividends
Quote from zeke3079:
To anyone actively using pairs strategy, how do you guys go about handling dividends, in regards to the short end of the pair?
Quote from waltbx:
Yah, well, thanks, but I took some losses soon after my post. "Pride goeth before a fall."
My profit is down to $3200. I'm not complaining, but thought I'd be straight with you guys. One large loss was a short on BARC (Barclay), a financial. The day after I sold it short, good news came out, and I cut my loss at $800 (on $2500 investment). I learned to stay away from financials, as someone posted earlier on this thresd. I ignored the advice. Financials have too much possibility for individual stocks to issue good or bad news in this climate.
Foolish mistake. But I learned something.
Thanks for the nice remarks. I'm a little gun shy now.
Walt B
Quote from waltbx:
Thanks for this, Jonny. I'll try to put it into practice. I'll add it to by worksheet spreadsheet.
I don't understand what you mean by "fade that direction."
Also Saico's tip about avoiding pairs that resist going into the top 1/3. "...that resists at least in the upper 3rd of its recent 150 days trading range seems to be optimal. " But Saico, I'm not clear on what you mean by the top 1/3 of the recent 150 days trading range. Could you be more specific?
Walt B
Re: Change
Quote from NKNY:
Curious, has anyone tested different settings on the lookback periods... IE, what happens if ratio lookback 14, stretch 14 are set to 20. Wont extending the lookback smooth out the ratio moving average and produce less trades.
Nick
Quote from knocks420:
Just wanted to bump my question regarding intra-day pairs trading, anyone currently doing or thinking of doing so?
Quote from waltbx:
FYI a couple of trades Friday and Today (Monday). I won't clutter Jonny's journal with my trades, but someone thought my use of expected ratio and expected profit was interesting.
My trade size is $2500 each side.
A pair entered Friday:
Long CS @ 30
Short LYG @ 4.29
Ratio 7 Expected ratio 9.51 for a profit of 9%
Closed CS today (without a signal from PTF) at 27.83 for a loss of $185. Letting LYG run with trailing stop loss, currently a profit of $400.
A pair entered today:
Short CCO @ 3.31
Long HHS @5.38.
Ratio: 0.615. Expected ratio 0.560 for profit of 4.5%
Walt B
Closed my same stock arbitrage trade on Monday for a profit
Sold SU.TO(TSX) @ 28.25
Covered SU(NYSE) @ 22.12
Hi Walt,
When I upgraded to the latest release of PTF my correlation charts had a huge dip in them right at that point. I installed the software and cleaned the database per your post on the subject and my charts look completely different as compared to the screen shots I took at the time a trade was initiated.
I made a post the other day about two pairs being at a zero deviation reading but the history showed no exit or in trade bar color and I sold them. Nobody responded with a similar experience, but I wonder if that has something to do with it.
Thanks for the information. My charts look better!
Hi Jonny,
I have done the same thing as Walt, holding one side of a pair. I have actually done it the opposite way though. I have sold a winning position and held the loser with a tight stop because the loser typically is a function of market direction. I just figure if we've had a few up days in this market we are due for a pull back. I gained back almost $300 on a short Monday using that approach. No science, just gut feel, and a gap of the market in the opposite direction could be painful. I think it's best to play the pairs straight up.
Quote from LazyLightnin:
Hi Walt,
When I upgraded to the latest release of PTF my correlation charts had a huge dip in them right at that point. I installed the software and cleaned the database per your post on the subject and my charts look completely different as compared to the screen shots I took at the time a trade was initiated.
I made a post the other day about two pairs being at a zero deviation reading but the history showed no exit or in trade bar color and I sold them. Nobody responded with a similar experience, but I wonder if that has something to do with it.
Thanks for the information. My charts look better!
Quote from waltbx:
Yesterday I rebuilt my data base in PTF and the charts were repaired. Today 19 of my first 40 stock had charts missing data from yesterday, so I rebuilt them today. Fixed, again.
But charts on the individual stocks are in reverse chronological order. Not the chart that appears from the Stock List, but the chart that appears when choosing a pair in the Console.
Can anyone suspect a good reason for this, or is it a programing error?
Walt B
Quote from Ivan:
Hey Walt,
I ran the "database cleanup" script you posted and it looks like it's done some bad things! Most of my pairs now have either 0 , -100 or +100 correlation
when looking at them thru the console.
If I analyse some of them, it has only brought in 2 days of data, so it's not pulling in the history again.
If I refresh the pair it doesn't make any difference.
Hope I don't have to delete all the stocks and add them again....
regards
Ivan
Quote from waltbx:
I don't think you need to worry about your pairs being lost, it's just the data associated with those pairs.
Here's what I'd do. I'd shut down PTF and try again. Copy and paste the script exactly. If that doesn't work, email Jason at PTF.
I too have some pairs that have very low or negative correlation, yet have good ratios. I don't understand that. Not well correlated, but very profitable.
Walt B
Calculating Correlation
Hi,
I am building my pair-trading system from the scratch.
I am now coding correlation between 2 stock prices.
My doubt now is, should i use Pearson Correlation or Spearman Rank Correlation ?
Anyone knows what is the algorithm used on PairTradeFinder?
Thanks
Quote from knocks420:
Because correlation is not the appropriate measure; look up co-integration. Ignore corr and focus on back-test results. [Although most will likely ignore me instead!]
Quote from waltbx:
Knocks,
Ok, I understand. However, I'm having trouble grasping how to identify pairs that are co-integrated. Co-related stocks can be found by industry and those I can grab in bulk and back test. But how do I identify co-integrated pairs?
I found interesting comments in another forum and include two below:
"The difficulty is finding these portfolios [of cointegrated pairs] that will maintain this stationary relationship for a long time out of sample. Unfortunatelly it is easy to find spurius cointegrations in the sample that won´t stand for long when you decide to go trading."
and:
"Cointegration is nice because it can capture the causal relationship between financial quantities (two stocks, one of which is traded actively and leads the other, for example) or complex dynamics (two stocks in the same business moving together, but then one takes market share from the other so they move apart). Correlation is popular in practice because 'it is there' i.e. it's the easiest way to model relationships, even though that model is not very stable."
Co-integration vs co-relation: http://www.tradingmarkets.com/.site...correlation.cfm
Walt B
I do a lot of pairs trading with my own system. The basic concept is to try to capture some of the spread b/t the two. Where it really gets interesting is where you have a group that correlates so that you can swap substitutes for winners.
Quote from LazyLightnin:
I have done the same thing as Walt, holding one side of a pair. I have actually done it the opposite way though. I have sold a winning position and held the loser with a tight stop because the loser typically is a function of market direction. I just figure if we've had a few up days in this market we are due for a pull back. I gained back almost $300 on a short Monday using that approach. No science, just gut feel, and a gap of the market in the opposite direction could be painful. I think it's best to play the pairs straight up.
Quote from spindr0:
IOW, if both legs rise, take the profit on the long leg and add a new long leg (different issue). Conversely, if the pair moves down, cover the short leg and replace it with another short. As a result, you're always booking profits which the market can't take away - as opposed to cutting a losing leg and holding the winning leg, which a gap will clobber.
closed very nice trade on thursday, significant profits on both sides
Sold BKI @ 2.40 (went long 2.18)
Covered IP @ 8.03 (went short 9.20)
John,
I have read that stocks liquidity, and institutional ownership has some impact on pairtrading profit.
The reason is obvious, market inefficiencies tend to be corrected much faster when the big players are involved.
Do you have any idea if these considerations are correct? Noticed this impact on your trades?
If you don't mind, i can analyze your trades historical data, and try to correlate the profits with stocks average volume, and institutional ownership.
Best Regards and good trades!
Quote from tatankas:
The reason is obvious, market inefficiencies tend to be corrected much faster when the big players are involved.
Hey guys,
I haven't been able to read the whole thread yet, so sorry if these questions have already been brought up but I was hoping if anyone in here trades/has traded pairs intraday they could answers the below questions...
- How much movement are you looking to catch in these intraday pair trades? 1%? Less? More? Are they correleated pair trades when you are going intraday or not?
- If you are only trying to catch one or two percentage points intraday, how have you found the B/A spreads effect you. For instance, do you only trade extremely liquid stocks or stocks above say $5.00(due to the automatic loss that could occur even if the stock B/A was a penny or two wide.).
- Also how do commisions/haircuts/ and interest rates play a role since I am guessing you would have to trade large volume and use margin to make money pair trading intraday.
Thanks for any help you can provide.
Long AEC @ 5.84
Short HME @ 35.20
Article from trader magazine talking about professional pair traders making heaps from the recent volatility
http://www.tradersmagazine.com/news...2965a:&st=email
Hello,
I was wondering from the .jpg that johnny posted what the following (4) calculations
1) Ratio for the last 150 days?
2) RSI for the last 150 days?
3) Plus/Minus for the last 365 days
4) Spread for the last 50 days.
Here is what I think they are I'm sure it's not all right...
1) Is this simply FirstStock / Second stock?
2) This is basically instead of doing an RSI on price, this is an RSI on spread?
3) Not sure what this is
4) this is First stock / Ratio - Second stock
1) Left stock / right stock
2) RSI of the ratio
3) Standard deviations from the mean
4) Highest stock price - lowest stock price
Quote from tatankas:
John,
I have read that stocks liquidity, and institutional ownership has some impact on pairtrading profit.
The reason is obvious, market inefficiencies tend to be corrected much faster when the big players are involved.
Do you have any idea if these considerations are correct? Noticed this impact on your trades?
Quote from jonnysharp:
Yes I read a research paper saying the same, I have yet to test this theory, I think it mostly explains why profit from pair trading exists oppose to a method. Some stocks have less liquidity than their peers, therefore taking longer for industry/market wide news to be priced in. Also some institutions may trade off news whilst others won't. The results of the next trade you take is largely random, however 50 trades isn't. Small edge x leverage = profits
Quote from waltbx:
One large loss was a short on BCS (Barclay), a financial. The day after I sold it short, good news came out, and I cut my loss at $800 (on $2500 investment). I learned to stay away from financials, as someone posted earlier on this thread. I ignored the advice. Financials have too much possibility for individual stocks to issue good or bad news in this climate.
Foolish mistake. But I learned something.
Walt B
Both last posts make the point:
Greater profits = Greater risks
Whether it be liquidity or news risks, sometimes these are one and the same.
This is not always the case of course but a pretty general rule in markets. So how would you counter this?
In general, in an increasing volatility regime you can decrease your size. If you do this you are giving up some profits to reduce your risk.
The alternative is to increase your frequency. You can do this by adding pairs or going to a shorter time-frame.
Hey guys,
I got me an IB account ! (no easy task being in Australia)
So now I can get those nice low commissions which you guys have been getting all these years...
I'm after some advice. Since IB offers a vast array of order types compared to what we "enjoy" here on local platforms, I would like to check with you what you consider the best order type for pairs trading.
First, a little background, up to recently I was catching the last half hour of the USA market which is early morning my time. Now day light saving has ended for us , so physically trading the last half hour is a bit of an ask now
So, I'm now looking at analyzing my pairs thru my day and placing order via IB fo rwhen the USA market opens late night my time.
Under these circumstances, would you recommend just market orders for both long and short legs ? I see IB has an order type "mkt at opening" but I would have though this is basically the same as a mkt order anyway.
Personally, I don't think limit orders would be appropriate as I don't want to get up in the morning to find only one leg of the pair has been executed.
So just after any advice you guys can give, still trying to find my way around the IB platform as it's quite complex compared to what I've been used to.
I've seen written somewhere that combo orders are good for pairs, but I'm still checking this out.
Johnny, I think you use MOC orders ?
Any reason why you don't do you trades at the opening ? (sorry if I'm wrong)
regards
Ivan
It's an old adage but it applies - look to let profits run and to cut losses (don't give up profits either). Look to capture as much of the move as possible not some fixed, arbitrary profit point.
Quote from user83248324:
How much movement are you looking to catch in these intraday pair trades? 1%? Less? More? Are they correleated pair trades when you are going intraday or not?
B/A spreads are a fact of life and obviously they're going to affect you. It's part of the cost of doing business. Deal with it
If you are only trying to catch one or two percentage points intraday, how have you found the B/A spreads effect you.
Make sure you're using a low fee broker. At 1/2 a ct a share, commissions are a mimimal consideration. You're main focus should be on the strategy. Trade only in size that you're comfortable with.
Also how do commisions/haircuts/ and interest rates play a role since I am guessing you would have to trade large volume and use margin to make money pair trading intraday.
Walt, yes financials do backtest really well as you noticed, i think without the crisis and extra volatility they still are a highly profitable group to pair trade, however tail risk is high in this group, i think the high profits is the markets natural premium for the risk assumed, there's nothing wrong with trading them so long you have a robust risk management strategy in place. If things keep on stabilizing il slowly incorporate financial pairs onto the radar.
thanks walt and definately thank you johnny for putting so much work into this. I have learned a tremendous amount and am greatful for all your hard work!
Cheers!
JB
what are you guys using for a profit target with pairs?
Im having a hard time on saying, Ive made ____ time to get out?
also Ive noticed the market seems to jump one way or the other the last 30 minutes, is it wise to try to get out of pairs intraday before the market on close madness occurs?
thanks
(success and failure with pair trader here)
IQfeed with PTF
Jared at PairTrade Finder says IQfeed is more reliable than the free Yahoo. I have a couple of question for those using IQfeed.
1) Does PTF refresh each 5 minutes (or as set in preferences) and does it refresh reliably with IQfeed?
2) Some of my charts skip the last few days (from April 2 jumps to today, April 7), resulting in ratios, mean averages, and +/- deviation charts not accurate. I would guess that this is the software, not the data feed. True?
3) I already get free real time data feed from Ameritrade and IB. I've asked Jared if I could use one of those feeds, instead of paying IQf $60/mon. Anyone have experience with alternate feeds?
4) What's the advantage with IQfeed, as you see it?
I've also asked Jared if they could arrange to have the $50 setup fee IQf charges waived, as some other software providers do.
Walt B
Quote from jeffbrewer:
thanks walt and definately thank you johnny for putting so much work into this. I have learned a tremendous amount and am greatful for all your hard work!
Cheers!
JB
HI Guys,
my normal portfolio management program doesn't really lend itself to pairs trading. No problem entering trades but they are recorded as individual trades so when looking at historical trades it's difficult to figure out the actual pairs.
Before I go putting together a spreadsheet to track the trades, just wondering if anyone would like to share their spreadsheet they use and what sort of metrics they may have setup to measure performance.
TIA
Ivan
Hello,
Anyone have read the book:
"The Art of The Arb" Trading Manual ?
from the site:
http://www.pairtrader.com/arb_info.html
It's quite expensive, i wonder if it worth the money.
Quote from spindr0:
It's an old adage but it applies - look to let profits run and to cut losses (don't give up profits either). Look to capture as much of the move as possible not some fixed, arbitrary profit point.
B/A spreads are a fact of life and obviously they're going to affect you. It's part of the cost of doing business. Deal with it
Make sure you're using a low fee broker. At 1/2 a ct a share, commissions are a mimimal consideration. You're main focus should be on the strategy. Trade only in size that you're comfortable with.
Quote from user83248324:
Let's say you know that a pair of stocks was going to trade at a 1% difference one day(ie, one goes up 11% one up 10%), could you even make money off this trade after the slippage, b/a spreads, and commisions? And even if you don't trade pair intraday, how much have you found these three issues effect your pair trades percentage wise (for commisions you can just state the rate you pay)? Thanks for any help you can provide.
If you have a reasonable commission schedule and do reasonable size, you can make money.
Quote from user83248324:
Let's say you know that a pair of stocks was going to trade at a 1% difference one day(ie, one goes up 11% one up 10%), could you even make money off this trade after the slippage, b/a spreads, and commisions? And even if you don't trade pair intraday, how much have you found these three issues effect your pair trades percentage wise (for commisions you can just state the rate you pay)?
The edge is where you find it not where you think it isn't.
Quote from jho:
I haven't done a lot of intraday testing on pair trading but from my experience the edge is over days and not minutes or hours. Don't take my word for it, do the testing yourself.
Quote from tatankas:
Hello,
Anyone have read the book:
"The Art of The Arb" Trading Manual ?
from the site:
http://www.pairtrader.com/arb_info.html
It's quite expensive, i wonder if it worth the money.
PnL
There are only 3 ways to increase return on capital: Lower expenses(commissions, rebates, entry/losses etc.); asset turnover, and good old fashioned leverage. If you're uneasy about the PnL swings, your size is too much for "you" probably.
Here's my .02: Cut your size by 1/3, and start aggressively scalping around your core. If you can maintain your return on capital with less size, your business is better off.
When I do my ROE comps for RV arbitrage, I always penalize the stocks whose CEOs juice returns with leverage. Any monkey can goose return levering up. Premiums are awarded for asset turnover and margins. Cheers...
pair and mental question, how do you guys handle the large swings in PnL during the day as your pairs are working?
today, I was up $900 early on, dropped to down $500 and then finished up about $200.
all my trades were pairs today pretty much. just wondering how does one stomach the big movements on PnL? [/B][/QUOTE]
Art of the arb is general pairs trading intraday using simple straight forward strategies and it also contains recaps of Rob and Steve's thoughts showing Position Blotters and recaps of trading days back in 2002 and 2003. Which I found most helpful when I was starting out. The main points of the whole manual are to fade bollinger band moves in pairs and do it over and over again. It's a good read, but now much of it is outdated.
Quote from spindr0:
The edge is where you find it not where you think it isn't.
This kind of reminds me of the swing traders who say that people should swing trade because you can't make money day trading. People should trade what they see and feel comfortable with.
Quote from knocks420:
I would be very interested if you could expand on this. Similar to the previous poster, I have tested a handful of intraday pairs and did not find it to be profitable....
Quote from spindr0:
This kind of reminds me of the swing traders who say that people should swing trade because you can't make money day trading. People should trade what they see and feel comfortable with.
I don't fit neatly into a label. My pairs aren't always pairs since they can have more than two legs. They tend to be dynamic in that they can be open for days or weeks but I tend to trade the components intraday... well, as much as possible. The legs can change as well. Some days I'm busy all day shuffling componets in and out. Other days, it's like watching paint dry
Quote from knocks420:
So your a discretionary intraday pairs trader?
Quote from spindr0:
I don't fit neatly into a label. My pairs aren't always pairs since they can have more than two legs. They tend to be dynamic in that they can be open for days or weeks but I tend to trade the components intraday... well, as much as possible. The legs can change as well. Some days I'm busy all day shuffling componets in and out. Other days, it's like watching paint dry
The legs can change as well. I also shift my bias during the day, going more long or short, depending on what I see. But by the end of the day, I'm back close to what I believe to be a neutral ratio.
Obviously, one is chasing the spread b/t the components. But another general idea is to try take profits on the winning side, substitute another leg (restoring the pair) and hold paper losses, waiting (hoping?) for a contraction. Some prefer to do the opposite but AFAIK, you book profits and hope to recover losses rather than the converse. Market reverses help you with the former, kill you with the latter.
Details are not available
Exited trade
Sold THG @ 31.94
Covered PTP @ 30.07
New trade
Long PUK @ 10.44
Short AXA @ 15.37
New trades
Long TRE @ 3.42
Short GFI @ 11.06
Long ACE @ 59.16
Short ACGL @ 47.51
Quote from jonnysharp:
New trades
Long ACE @ 59.16
Short ACGL @ 47.51
Yes your right Walt thanks for pointing that out, I did a typo, ACE and ACGL are in the wrong lines, suppose to be;
Long ACGL @ 59.16
Short ACE @ 47.51
Quote from jonnysharp:
Yes your right Walt thanks for pointing that out, I did a typo, ACE and ACGL are in the wrong lines, suppose to be;
Long ACGL @ 59.16
Short ACE @ 47.51
Yes I guess its a matter of opinion, to me it all looks fine, ranging ratio chart, spread at 50 day lows, 2.3 stdevs from the mean. Of course ive been wrong before, trade by trade results don't matter though.
New trades
Long IP @ 7.22
Short BKI @ 3.11
Long MGG @ 18.02
Short ETE @ 23.20
Might be time for me to wipe the slate clean, remove all pairs, perform fresh backtests and create new watchlists, Ive had the current pairs for several months now, might be collecting a bit of dust.
Does anyone here trade the fundamentals of pairs i.e. book value, p/e ratio etc.? And do you trade portfolio of pairs or do you target just one or two pairs a day?
Quote from dealmaker:
Does anyone here trade the fundamentals of pairs i.e. book value, p/e ratio etc.? And do you trade portfolio of pairs or do you target just one or two pairs a day?
I think fundamentals are only necessary if your average trade length is greater than a month, since most of us are only holding trades for several days its not relevant imo, although it wouldn't hurt being on the right side of the fundamentals.
New trade
Long CMP @ 49.77
Short SYT @ 41.88
Jonny,
Quote from jonnysharp:
I think fundamentals are only necessary if your average trade length is greater than a month, since most of us are only holding trades for several days its not relevant imo, although it wouldn't hurt being on the right side of the fundamentals.
New trade
Long CMP @ 49.77
Short SYT @ 41.88
Yes your right Don, im showing low correlation aswell, don't know how I missed that, first time Ive done that, anyway no biggie.
Closed a trade for nice profits
Sold PUK @ 12.00
Covered AXA @ 15.52
2nd time in the last month Ive made good profits on this pair, maybe time to slip back into financials with the low-risk industries in that space. Portfolio is at all time high.
Relative to the CMP/SYT trade, I kinda liked it despite the low correlation and took a small position. The last couple of months I've noticed that pair trading in-general seems less profitable perhaps because volatility is lower. I'm wondering if using lower correlation pairs is a way to artificially introduce volatility.
Quote from jonnysharp:
Yes your right Don, im showing low correlation aswell, don't know how I missed that, first time Ive done that, anyway no biggie.
Closed a trade for nice profits
Sold PUK @ 12.00
Covered AXA @ 15.52
2nd time in the last month Ive made good profits on this pair, maybe time to slip back into financials with the low-risk industries in that space. Portfolio is at all time high.
Anyone have read the book:
"The Art of The Arb" Trading Manual ?
from the site:
http://www.pairtrader.com/arb_info.html
It's quite expensive, i wonder if it worth the money.
I've got the manual and it makes good reading. Please make an offer if you'd like to buy it. I'm based in the UK , so it would need to include $20 for shipping if you're outside the UK.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
jonny, as I've come into this thread quite late on, can you tell me what your current ROI is, approx ? Also, d'you use PTF to exit trades too ? Sorry if you've been asked these things a lot
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Exited trade for profit
Sold MGG @ 19.68
Covered ETE @ 24.18
Il do an performance update next week, going out now, have a great weekend everyone.
Quote from Don87109:
One new concern, I just noticed that SYT goes ex-dividend at $1.07 on April 21. Hopefully, we'll be out by then.
Don
Anyone knows if the economatica pairtrading module, is any good?
http://www.economatica.com/longshort.html
Seems an excelent tool:
Screening
"
In addition to analyzing user-selected pairs, this module can perform screening. Through this process the system will screen through thousands of pairs and identify those that meet the user's criteria.
Filtering criteria consists of the following types:
- Find pairs whose ratio is greater than N standard deviations from the mean
- Find only non-directional pairs (low beta)
- Find only intrasector pairs
- Find only pairs of different classes of shares of the same company
"
FWIW - I got out of this trade on Friday with a small profit. This morning the divergence got bigger than I have seen before so I decided to jump back in and pay the dividend if necessary.
Quote from Don87109:
Relative to the CMP/SYT trade, I kinda liked it despite the low correlation and took a small position. The last couple of months I've noticed that pair trading in-general seems less profitable perhaps because volatility is lower. I'm wondering if using lower correlation pairs is a way to artificially introduce volatility.
One new concern, I just noticed that SYT goes ex-dividend at $1.07 on April 21. Hopefully, we'll be out by then.
Don
jonny,
As a more experienced PTF user than I, perhaps you can comment on a post I put on their forum. I'm currently trialling their software and from an indicator standpoint, its so far looking good. What I can't understand is their 'back office' design. Here is a quote from my forum post:
"Surely when an Enter or Exit Trade appears one should be able to right-click the pair (or link from an icon at the top) and enter or exit a trade by putting in the price you obtained and the number you bought. This info should then appear in the Portfolio where prices are updated as is the main screen, together with a current P&L. When you Close a trade the details should then similarly be sent to the Portfolio together with a P&L for the round trip."
Perhaps I'm missing something but your comments would be appreciated.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Dr Who I can't comment on the portfolio mgmt feature, I didn't like it either and Ive been using a spreadsheet the whole time to record trades and that works fine.
As per several requests Id thought Id do a performance update.
Start of journal: 18th August, 2008
Cut off date: 22nd April, 2009
Return: 93.73%
Annualized: 139.89%
Biggest Drawdown: 8.9%
SP500 Return: -33.4%
Outperformance: 127.13%
Using a generous risk free rate of return of 3% my sharpe ratio is 15.38 ((139.89-3)/8.9) long term stock market average is 0.40, hedge funds consider above 2.00 to be good and above 4.00 to be exceptional, so Im very happy with my risk-adjusted returns and my absolute return aswell.
Below is my a/c equity curve since starting, you can see a soft patch at the start when the market was very dislocated last year and when I didn't have my current trade filters, since then Ive improved my performance and conservatively increased my trade size.
Also attached is a pdf doc showing all my trades Ive taken exactly as Ive entered them in this journal in real time, no hindsight trades.
I really owe a big thank you to the team at pairtrade finder for sharing an incredible piece of software that actually has worked for me, it has definitely changed my life for the better.
Jonny.
Quote from jonnysharp:
As per several requests Id thought Id do a performance update.
Start of journal: 18th August, 2008
Cut off date: 22nd April, 2009
Return: 93.73%
Annualized: 139.89%
Biggest Drawdown: 8.9%
SP500 Return: -33.4%
Outperformance: 127.13%
Using a generous risk free rate of return of 3% my sharpe ratio is 15.38 ((139.89-3)/8.9) long term stock market average is 0.40, hedge funds consider above 2.00 to be good and above 4.00 to be exceptional, so Im very happy with my risk-adjusted returns and my absolute return aswell.
Below is my a/c equity curve since starting, you can see a soft patch at the start when the market was very dislocated last year and when I didn't have my current trade filters, since then Ive improved my performance and conservatively increased my trade size.
Also attached is a pdf doc showing all my trades Ive taken exactly as Ive entered them in this journal in real time, no hindsight trades.
I really owe a big thank you to the team at pairtrade finder for sharing an incredible piece of software that actually has worked for me, it has definitely changed my life for the better.
Jonny.
Thanks jonny and for your comments re Portfolio Management.
I've had a reply from PTF about this issue and they say they are aware of it and should be upgrading it in V3 later this year.
My own trial is going well with my first trade closing yesterday at a good profit and far exceeding the current 'in trade' deficits.
I still find their interface troublesome and its difficult to find when to close trades if you have a large watchlist because the app doesn't seem to be aware of those trades you're 'in' and those you arent.
Still, as far as finding when to get into a trade it appears to be working OK and that's the nub of it really....
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
nice job Jonny !!
Quote from jonnysharp:
As per several requests Id thought Id do a performance update.
Start of journal: 18th August, 2008
Cut off date: 22nd April, 2009
Return: 93.73%
Annualized: 139.89%
Biggest Drawdown: 8.9%
SP500 Return: -33.4%
Outperformance: 127.13%
Using a generous risk free rate of return of 3% my sharpe ratio is 15.38 ((139.89-3)/8.9) long term stock market average is 0.40, hedge funds consider above 2.00 to be good and above 4.00 to be exceptional, so Im very happy with my risk-adjusted returns and my absolute return aswell.
Below is my a/c equity curve since starting, you can see a soft patch at the start when the market was very dislocated last year and when I didn't have my current trade filters, since then Ive improved my performance and conservatively increased my trade size.
Also attached is a pdf doc showing all my trades Ive taken exactly as Ive entered them in this journal in real time, no hindsight trades.
I really owe a big thank you to the team at pairtrade finder for sharing an incredible piece of software that actually has worked for me, it has definitely changed my life for the better.
Jonny.
__________________
Rod
"My destiny will NOT be denied. His will be done." - Patton
Quote from jonnysharp:
...Using a generous risk free rate of return of 3% my sharpe ratio is 15.38 ((139.89-3)/8.9) long term stock market average is 0.40, hedge funds consider above 2.00 to be good and above 4.00 to be exceptional, so Im very happy with my risk-adjusted returns and my absolute return aswell...
Jonny.
Filters are;
1) unique industry-only pairs
2) correlation above 80% and rising
3) non-trending ratio chart and good distance between ratio and avg ratio
4) spread near 50 day high if im bearish the spread and vice versa if im bullish
Equity curve attached.
Quote from total_keops:
FYI, the Sharpe is not a good mesure of performance. It is a well know fact in the performance of hedge funds literature. It only accounts for the two first moments (mean and standard deviation) and therefore assume that the returns are normal (gaussian). I'm sure there is a negative skewness (infrequent big losses) in the returns distribution and the Sharpe does not account for that and also the tail risk. Anyways, it's a first benchmark.
Good job BTW.
comparison
Johnny, great job.
For what it's worth i can share some stats from someone else (me) who is trying to do this and is doing well...although not as well. Following more or less the same strategy from PTF (although usually picking different pairs for whatever reason) here is what I have:
Johnny has about a 64% winning percentage and his wins and losses both average around $800 per $10,000 based on around 101 trades (i did not look at the PDF but had created my own list of his trades while studying his approach). Great stats!
I have done 57 trades starting in January. I have a 74% winning percentage and the same loss amount, about $800, but my winners only average about $550 (per $10,000) vs his $800 per trade. I haven't taken the time to study yet why - but i don't filter for volatility and my guess is that i make a higher percentage of winning trades with a lower average win because i'm getting into trades that don't have a high enough volatility for Johnny (since I don't really look at that yet). For instance I've made an SPY/DIA trade that was almost a slam dunk but had a very low return.
So...so far i'm happy. Over 50% IRR in closed trades and should still be > 30% or so once I close one or two bad trades that are out there.
Things I'm going to do to try to improve:
1. Look into my selection to see if i can tell why my average win is so much smaller.
2. Consider not trading a stock if it has an earnings report coming out. One big loser that did not close is a big loser because of an earnings report.
3. Look at stops. I read somewhere that someone suggested an 11 day stop. I can say that almost every significant winner was done within 10 days or so...and my one big loser is bigger than it was after 11 days. I"m going to study to figure out if there is a stop (days or percentage) because right now i am not using stops.
Bottom line...if you read this journal and follow the rules...you should be able to be profitable.
Thanks for the comments guys, well done mlsignups on your results too.
Closed trade for profit
Sold ACGL @ 56.06
Covered ACE @ 43.99
New trades
Long MGG @ 18.85
Short TPP @ 26.12
Long TMK @ 26.28
Short MET @ 28.20
Does anyone know where intra day data would be available for pairs and can be formatted in either price bars or candlesticks? If the source is free that's better.
Thanks.
As I'm trading slightly differently to jonny and also trading UK stocks, I thought I'd share what's happening to my 'book' of trades.
I'm using PTF to enter spread-bet trades with CMC at just £1 per point as I'm still learning.
So far I have closed one trade at a profit (in just 4 days) of £188.39.
I currently have 10 trades open, only 2 of which are losing and which in total are in profit to the tune of £189.11.
At the moment I'm not really filtering the trades as strictly as jonny but I've chosen pairs that have a solid historic correlation of over 70%, have a high percentage of profitable historic trades and good longterm profit. Perhaps my slightly slack filtering will come back to bite me and I'll have to adjust things but that's how I like to work anyway as I learn from my mistakes. But things are looking positive at the moment, although as I've mentioned before, there are numerous shortcomings with the PTF interface which hopefully they will correct in the next version
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from jonnysharp:
Thanks for the comments guys, well done mlsignups on your results too.
Closed trade for profit
Sold ACGL @ 56.06
Covered ACE @ 43.99
New trades
Long MGG @ 18.85
Short TPP @ 26.12
Long TMK @ 26.28
Short MET @ 28.20
Now 3 closed trades. All in profit. Running P/L +£287 to £1/pt spread bet account. Open P/L +£114....
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Help
Hello
Thank you very much for the help of all the traders that posted in this thread, i l just read it from the biggining and learn a lot, i just downloaded a trial of PT and my first problem is wich sectors to choose to do backtesting if someone could help i would apreciate.
Good trading for all of you
Paulo33
Ivan,
I think the charts you are looking for are available under options by clicking on the pear at the top left of the page. You can then choose a charts tab and choose to show four charts - there are six available from memory.
It would be good if all six were available easily, as there are 5 I like to look at to get support for a go/no go decision.
Regards,
oby
Quote from oby_2:
Ivan,
I think the charts you are looking for are available under options by clicking on the pear at the top left of the page. You can then choose a charts tab and choose to show four charts - there are six available from memory.
It would be good if all six were available easily, as there are 5 I like to look at to get support for a go/no go decision.
Regards,
oby
Awesome thread and results.
Thanks Ivan. I'll check my version when I'm home and let you know. I do recall Johnnie mentioning he was Beta trialing a new version previously, but he'll confirm that.
Cheers
Ivan,
I was looking for those too but I suspect jonny has a different, pre-release version to the current download.
One other thing that needs to be looked at imo is a way of being able to save (or highlight) your current traded pairs in the Console. I thought I could do that by clicking on the pin, which made the pair to go the top but it seems 'Save Layout' doesnt save the pinned pairs to the top. This would be handy because with many pairs its difficult to keep track of where your actual trades are.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
Ivan,
I was looking for those too but I suspect jonny has a different, pre-release version to the current download.
One other thing that needs to be looked at imo is a way of being able to save (or highlight) your current traded pairs in the Console. I thought I could do that by clicking on the pin, which made the pair to go the top but it seems 'Save Layout' doesnt save the pinned pairs to the top. This would be handy because with many pairs its difficult to keep track of where your actual trades are.
Quote from Ivan:
Hey Jonny,
have you got updated software that I don't know about ? Where did you get the % column and percentfrommean chart ? I'm running the same version according to your pic (2.50727) but I can't find those settings...
regards
Ivan
Backtesting report.
correlation
Hello,
The correlation shown on PairTradeFinder is the prices correlation or stocks returns correlation?
I always looked at prices correlation, but according to a friend, it's possible to get "false" correlations, when looking only on price correlations.
Returns correlations should be a better indicator.
Quote from jonnysharp:
Yes Im on their beta testing list, just send an email to them requesting to be placed on the list. They give you a special link to download the lastest update from. Pretty cool the new % from the mean feature, shows the profit potential of each trade and how far in % terms the pair is currently from its mean, good to see in addition to stdev +/- from the mean as the stdev can get smaller in a time period and still produce a signal but for eg, may be only 2% from its mean, when historical divergences average 6%. You can chart it aswell. Also they improved backtesting dramatically, you can see heaps of new readings for each pair like winning %, win/loss, biggest winning trade, biggest losing trade, avg days in trade, etc,, and you can see the equity curve for each pair. I spent Saturday building new watchlists, deleted all my current pairs as heaps had declined in correlation, backtested all my stock groups, ranked them by avg correlation, went through and added all the one's with nice equity curves, I figure the pairs that are working well within the system logic ought to be the best candidates expected to continue to do so, also I make sure that the majority of profits weren't generated from one or two trades. With these pairs the win rate is generally above 70%, win/loss is above 1.00, biggest loss is less than $1,000, avg days in trade is less than 10 and median PnL is above $400.
Attached is a screenshot of the new console and backtesting report.
Quote from Dr Who:
Now 3 closed trades. All in profit. Running P/L +£287 to £1/pt spread bet account. Open P/L +£114....
CMC
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Re: Help
Quote from Paulo33:
Hello
Thank you very much for the help of all the traders that posted in this thread, i l just read it from the biggining and learn a lot, i just downloaded a trial of PT and my first problem is wich sectors to choose to do backtesting if someone could help i would apreciate.
Good trading for all of you
Paulo33
New trades
Long CNMD @ 12.31
Short SMTS @ 14.90
Long JBHT @ 26.89
Short KNX @ 17.38
Closed my third trade at a loss of £31.38. This wasn't indicated by PTF but I felt the trade was going nowhere and it had been 11 days since it was opened. So my current profit stands at £255.96 with open trades in profit of £32.20. All at a £1/pt with my spread betting company CMC.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Hello Johny,
I noticed on your last screenshots, that you give some attention to PercentFromMean and PlusMinus indicators.
What do you expect to see on those windows?
Thanks and keep the good work.
I find it funny that now your boys at pairtradefinder are sending out spam emails linking to this journal.
Wonder if that makes this journal spam?
What do you think Johnny?
__________________
Spiral Out. Keep going.
Nothing wrong with sharing good information - I wish I had known about PTF and this thread sooner.
__________________
Happy here and now!
Sure, but his point is that this is a damn good marketing campaign.
Or, maybe this is just good, honest information exchange.
Do we want an ET forum where negativity and dissatisfaction are welcome but if traders get together to share success stories and information about something that works are accused of spamming?
It makes more sense, imo, to give the principals on this good thread the benefit of the doubt. I have learned a lot here - and for that I am grateful. Therefore, I hope to see them post more good info over the next few weeks.
__________________
Happy here and now!
Quote from Reaver:
I find it funny that now your boys at pairtradefinder are sending out spam emails linking to this journal.
Wonder if that makes this journal spam?
What do you think Johnny?
They have a lot of info on their website, take a look.
__________________
Happy here and now!
Quote from gkishot:
Why not for pairtradefinder to provide the performance record of their system instead of referring to somebody's else results. It would have more meaning to the potential users of their service.
__________________
Spiral Out. Keep going.
So, Reaver, do you work for their competition?
Quote from Reaver:
LOL bravo to PTF's marketing team...
__________________
Happy here and now!
Yes, but, watch out - if you tell us what it is that you think is useful, some may accuse you of spamming and working for the bad guys...
Quote from Reaver:
...Guess I'll just stick to the boring stuff. It pays the bills.
__________________
Happy here and now!
One new trade:
Short MDY @ 99.45
Long VO @ 43.87
I started this journal to help my own discipline in trading, I made a commitment to myself to stick to this journal, its not as easy to deviate from a laid out trading plan when your trading in front of other people, therefore it keeps me systematic, im not here to pimp pt finder, couldn't care less about that, as my results have shown this journal has significantly helped me and others, ive learnt a lot over the years from more experienced traders than me, so I feel satisfied I can help others aswell, and many guys have come on here not knowing much and learnt pair trading and have personally thanked me for sharing my knowledge, this gives me great satisfaction and helps us all, because isn't that what we are here for, to band together to learn and grow as a community of the online traders we are, otherwise the markets will just be dominated by a few large players. Im still learning new things all the time, and many of my ideas have come from the posts in this journal from others which Im grateful for, Ive become good friends with Jared from pt finder and we talk every other day, he asked me if he could share my results with his other clients and I said yes, It doesn't bother me at all, Im here to trade and get better and thats it.
Alright back to business, just closed 2 very profitable trades
Sold IP @ 10.54
Covered BKI @ 3.84
Sold MGG @ 20.10
Covered TPP @ 26.10
There are always people who feel that any form of positive results from software must be engineered spam from the distributor of the software. That's the nature of forums I'm afraid and the only way to deal with it is to ignore it.
I'm simply trialing it at the moment and dont have anything to do with PTF. I've trialed and purchased virtually all the trading software out there over the past 20 years or so and must say that most of the predictive stuff just doesnt work so I can see why some people may be cynical.
However, things are looking good at the moment but the number of trades (for me at least) are low and I wouldnt want to assume too much at this stage.
I'm a different type of trader to most of you I suspect because I treat it more like gambling. I have developed my own automated arbitrage software for sports betting and that's done well in the past, although these days its difficult for me to get a substantial amount on because I've been tagged as an arber by most of the sports books and they've reduced my limits to very low numbers.
I've read almost everything to read about risk and statistical arbitrage and I like the concept although its not strictly what I would call arbitrage. Its still dependent on a historical relationship being walked forward into the future and as we all know, historical relationships have a nasty habit of breaking down when we least expect it.
These days most of my income comes from automated software I have developed to take advantage of inter-sports exchange anomalies that I've found that are not based on historic relationships. That and my ability to trade FX at times of news releases.
Meanwhile, I'm always looking for software thats worth testing, so rather than cynically decrying other people's genuine attempts at finding an edge, it wont cost anyone anything by engaging in the free 30-day trial that PTF offer.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Took profit of 0.43% on a target of 1.19%.
Covered MDY @ 100.26
Sold VO @ 44.47
As for the PTF, having build my own system from scratch all by myself, I can tell you it's a real bargain price for such a specialized product.
It is always interesting to hear experiences from people working on the markets for a long time.
How did you developed your own automated arbitrage software? Some webscraping on the betting websites, loading the data to a database, and generating alerts when a arbitrage oportunity is found?
Since you was tagged as an arber, never considered using an identity of some friend or relative
" That and my ability to trade FX at times of news releases."
Are you on the high-frequency trading business?
lol, the Jesse Livermore of sport betting. Smart idea.
Quote from tatankas:
How did you developed your own automated arbitrage software? Some webscraping on the betting websites, loading the data to a database, and generating alerts when a arbitrage oportunity is found?
Since you was tagged as an arber, never considered using an identity of some friend or relative
" That and my ability to trade FX at times of news releases."
Are you on the high-frequency trading business?
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
New trade:
Short ACE @ 47.13
Long AXS @ 24.66
Target ratio 1.8 (5.82%)
Quote from total_keops:
New trade:
Short ACE @ 47.13
Long AXS @ 24.66
Target ratio 1.8 (5.82%)
Quote from tatankas:
Total, are you aware that both companies presented 1Q results?
Normally, I get nervous when earnings haven't been issued and are very near. A lot of unknowns can sometimes raise their ugly heads upon earnings release.
Quote from tatankas:
Total, are you aware that both companies presented 1Q results?
New trades
Long TNP @ 15.48
Short OSG @ 28.12
Long PBNY @ 8.87
Short NWSB @ 18.12
Quote from Don87109:
Normally, I get nervous when earnings haven't been issued and are very near. A lot of unknowns can sometimes raise their ugly heads upon earnings release.
I'm curious why you seem concerned that earnings have been previously released?
Thanks
Don
Okay, I got it.
Quote from tatankas:
According to my strategy, this trade makes no sense.
Look:
28 April:
Insurance provider ACE Ltd.'s profit jumped 50 percent in the latest quarter, more than Wall Street expected, as the company benefited from a "generally firming market" that helped spur new polices and higher revenue from premiums.
27April:
PEMBROKE, Bermuda (AP) -- Axis Capital Holdings Ltd. said Monday its first-quarter profit fell by 51 percent and missed analysts expectations because of investment losses.
In my approach, i look for abnormal and unjustified deviations.
This deviation is fully explained by the presented results.
Closed the trade in the first minutes.
Once again at half profit target.
Covered ACE @ 47.10
Sold AXS @ 25.27
Net +1.95% profit from a target of 5.82%.
Quote from total_keops:
Closed the trade in the first minutes.
Once again at half profit target.
Covered ACE @ 47.10
Sold AXS @ 25.27
Net +1.95% profit from a target of 5.82%.
Did short ICE, long CME hit any radars? Looks like a nice opportunity.
__________________
What's a sundial in the shade?
Quote from matador04:
Did short ICE, long CME hit any radars? Looks like a nice opportunity.
Quote from tatankas:
Nice trade total.
What is your broker, and for this particular trade, how much did you spend on commissions?
Are you using leverage on your pairtrades?
I am still searching for the best solution, to implement my pairtrading strategy.
Thanks
After seeing your note I did think it looked attractive from a price ratio perspective, but I didn't have time to study any other factors so I did not bite.
Quote from matador04:
Did short ICE, long CME hit any radars? Looks like a nice opportunity.
I'm new to this thread, and would be happy to contribute with ideas for pairs. I'm also interested in money management techniques given recorded performance data, as I am a disciplinedtrader. I trade UK, European and US stocks.
What are the pairs that others are using?
How do you guys set an exit point for the trade, and in particular for losses?
Quote from total_keops:
As for the PTF, having build my own system from scratch all by myself, I can tell you it's a real bargain price for such a specialized product.
I've been pair trading for awhile and wondered whether anyone uses specific techniques for pair trades that go against you for one reason or another (e.g. surprise earnings announcement, contract win, broker upgrade/downgrade,...etc).
For example, say I short Stock A, and go long Stock B. (Take it for now that both stocks are in the same sector and have a correlation coefficient, r, of at least 0.8).
A day later and Stock A has a broker upgrade. My experience shows that in such an example, despite the high correlation coefficient, A would be more liable to rally than B would.
Therefore, if the mean dispersion continues to increase one could:-
a) re-enter twice as hard
b) take the loss on Stock A and ride Stock B hoping that momentum from upgrade of Stock A will spur Stock B on even more
c) do nothing and let the original pair trade continue
I just wondered what are people's thoughts on this and how do you control the unexpected when pairtrading?
This kind of leads me on to ask what type of drawdown people experience from pair trading. (I'm really talking % from overall market exposure from both pairs).
Thanks,
Mikee
Quote from tradingtrading:
I'm new to this thread, and would be happy to contribute with ideas for pairs. I'm also interested in money management techniques given recorded performance data, as I am a disciplinedtrader. I trade UK, European and US stocks.
What are the pairs that others are using?
How do you guys set an exit point for the trade, and in particular for losses?
Quote from Mikee:
I just wondered what are people's thoughts on this and how do you control the unexpected when pairtrading?
This kind of leads me on to ask what type of drawdown people experience from pair trading. (I'm really talking % from overall market exposure from both pairs).
Thanks,
Mikee
Quote from Mikee:
I've been pair trading for awhile and wondered whether anyone uses specific techniques for pair trades that go against you for one reason or another (e.g. surprise earnings announcement, contract win, broker upgrade/downgrade,...etc).
Quote from jonnysharp:
Generally money management is don't put more than 30% of your account in any one position, in that case even if a stock halves overnight you have only lost 15% of your a/c. Most of us here don't use stop losses, only exit when the pair comes back to the mean.
paper trades
Quote from jonnysharp:
Exited trade
Sold THG @ 31.94
Covered PTP @ 30.07
New trade
Long PUK @ 10.44
Short AXA @ 15.37
Passed the following trades, was not totally confident;
AEE/LNT
MHS/OCR
OEF/EWU (ETFs)
2 You could also create an algorithm or use 'rate of change' indicators to try and pick a spot when the ratio eventually roll over.
new ptf
thanks for the heads up about the beta testing of the new version. that's a drastic improvement, gives me way more confidence being able to see equity curve and winning % and biggest loss
I really appreciate what you are doing here, that heads up has literally saved me several grand in the past week by updating/changing out to better pairs
Quote from tradingtrading:
Have you ever looked at using Kelly Optimal fractions in order to control money management? I'm new to this and am trying to build up some data with which to estimate these fractions.
I guess that trading when it comes back to the mean, means that the average Win and Average Loss will be assymetrical. Have you thought of setting targets with a fixed stop loss/take gain (say 2% ex comms) and that way, if you have a winning record it wont be hard to work out how to manage the risk of ruin, but still optimise return?
appleseed, yes MOC orders most of the time or try and enter right before the close, I find trading around the close to be the best time, more liquidity, tighter spreads, reduced volatility. I know yahoo use CSI as their data supplier, and I would say they receive the NYSE closing price aswell, the whole idea of the opening cross and closing cross is to create a definite price for open and close that can be used and accounted for, so everyone see's the same price otherwise everyone would have a different price at 4pm.
No probs zeke.
Fridays Trading:
Closed trades:
Sold AEC @ 5.53
Covered HME @ 35.32
Sold TMK @ 29.26
Covered MET @ 27.58
New trades:
Long MA @ 172.84
Short V @ 65.01
Long DAC @ 4.07
Short SB @ 4.89
Sitting on a 110.4% return for the journal, portfolio at all time high.
The last couple of days havent been too good for my growing portfolio. I have closed 4 trades in all (3 winners) for a profit of £255.96 (£1/pt spread betting). I have 13 open positions, 7 of which are losing. My open position are down £39.15. I'm now starting to be a little more selective in the positions I open. I've also moved my new trades to Tradefair from my usual account at CMC only because I have a good relationship with Betfair and the TF spreads are sometimes a little tighter than those of CMC.
My coder and I are also developing a new user interface for the CFD exchange Tradefair will be opening later this year. We intend to make this available to Betfair users too. It will have very similar functionality to Button Trader which is a great piece of kit.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Does anybody here try PairTrade Finder's Trial Version? Is it available for full functionality?
my biggest problem with pair trading is the the day to day gaps in my in PnL
I have lets say 20 pairs out, all about the same dollar value, boom the market opens and Im up $2000 or down $2000 within 10 minutes from the steep gaps overnight.
it kills my ability to trade the rest of the day if Im down so much from pairs so early.
also it seems pairs are more of a semi-investment then a trade as Ive held some pairs for over 4 weeks.
Ive heard of a few guys who trade pairs and close everything at the end of the day, he trades oil pairs all the time, and done by the end of the night. but overcoming comissions would be hard, but I like the fact I dont need to worry about the steep gaps.
last week I had a few oil stocks for pairs, the overnight gaps killed me! ugh
plus when you backtest pairs, it does work but the long periods of being down dont mix well with my personality.
My biggest problem with the pair trading is to decide when to close the position and what to do when the pair goes against me.
Quote from gkishot:
My biggest problem with the pair trading is to decide when to close the position and what to do when the pair goes against me.
Sounds to me like you're over trading your capital.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Does Pairtrader disclose the logic of the selection process and the trade entry and exit rules?
Jonny,
Even though you say your maximum drawdown is 8.9%, i assume this is on closed equity. I would expect (for any pairs trader) that the maximum trade drawdown (for any one trade) or the MAE would be significant.
Of course closed equity for many of us this is the most important measure of performance, but others may not be able to stomach the drawdowns (essentially the "journey") of a pairs trading method. Which pretty much means its not for them. Horses for courses.
I've just got a programmer to write me a pairs trading system in Amibroker. I've found that the backtesting ability of pairs trade finder was not upto my standards (Im used to TradeSim). Actually its very poor.
Jonny congrats on your results. Well done and keep up the good work.
Yes it was on closed equity, I don't know exactly because I don't measure nor look at open PnL, however I would say that max drawdown including open equity wouldn't have been more than 10% which is easy on psyche, its once you go above 30% drawdown that it becomes gut renching and most hedge funds close down if they ever reach a 50% drawdown so Im far from that. Yeah pt finder backtester was crap for awhile, but they just dramatically improved it recently, you can now see heaps of different results including equity curves, really glad they did this, has helped alot. I used it several weekends ago to re-do all my watchlists and add more profitable and robust working pairs to my radar.
Quote from PCanyon:
Does Pairtrader disclose the logic of the selection process and the trade entry and exit rules?
New trade on Monday
Long ALL @ 23.41
Short CNA @ 13.65
Closed my 5th trade at a profit of £31 , so now have closed 5 trades, 4 of which were profitable for a total of £287.26 (£1/pt spreadbet). 12 open positions in profit of £22.75.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from jonnysharp:
New trade on Monday
Long ALL @ 23.41
Short CNA @ 13.65
During the course of the day I closed a few trades that appeared to be just 'hanging about' and have lasted over 10 days. I think someone else posted a while back that trades open for longer than 10 days generally close for a loss, so I did a bit of culling.
This means out of my 11 closed trades, 4 were for a loss and I'm in profit to the tune of £344 (at £1/pt spreadbetting).
I have 4 open trades currently losing about £72.
Because things are looking pretty positive in so far as PTF having legs, even when pairs have been chosen without too much care I've taken steps to re-read jonnysharps filtering methods and I'm now being a little more selective in the trades I open. Today's last trade (opened about 2 hours before the close in the UK) is already 13pts to the good which is nice.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
It's been a while since I posted, and hats off to you Johnny, great job on achieving your results. I'm re-reading the journal now that I have time to start trading again, and I have a question regarding your recent MA-V trade.
A recent post you mentioned a rule based on bullish/bearish sentiments defined by the 50day low/high of the spread. If I understand your definition correctly, it looks like your being bullish on this trade when the spread is close to the 50 day high, when this was originally determined as a bearish sentiment.
If I'm correct, can you comment on your trade decision that overrode this trade rule?
Thanks again for your efforts in creating a very educational journal.
Adrian
Guys, Il answer both your questions at once, basically I have guidelines for potential trades, these are rigid rules as such, so whilst I look at several different charts and analysis, not all of them have to strictly conform, in the MA/V eg, the spread isn't at the extreme but its close, i liked the overall picture of the trade so I took it, remember we can trade without the filters and still turn a profit, the filters just prevent us from entering big losing trades, its risk reduction we are focused on, not trying to make every trade we take a winner which is impossible.
New trades
Long LNN @ 39.69
Short BUCY @ 25.43
Long MET @ 27.71
Short PRU @ 31.00
Quote from jonnysharp:
New trades
...
Long MET @ 27.71
Short PRU @ 31.00
Quote from jonnysharp:
New trades
Long LNN @ 39.69
Short BUCY @ 25.43
Long MET @ 27.71
Short PRU @ 31.00
Quote from neospecialist:
I'm confused about the LNN/Bucy pair. According to Pairtrade Finder, the signal was given on May 1st- Closing Prices 39.37 and 23.36. You seem to have put on the trade much later at very favorable prices. Could you explain the difference and what strategy you employed to wait for a better entry price?
This is an excellent thread and I have enjoyed reading it from start to finish. J-sharp deserves serious credit for following through all this time. Two questions if I may:
Does anyone make beta adjustments on either a total portfolio or individual trade basis?
If so would you mind sharing thoughts / methods used?
This could be a way to smooth performance and thus make the pair relationships the true crux of the account. Not to mention that placing / lifting the hedge could offer an extra chance to buy low/sell high. I'm assuming that SPY would be the vehicle of choice more often than not.
I thank all in advance who have insight on this issue, and would especially like to hear from Don Bright or any of his traders. This seems like something they may do or at least have considered.
I think it makes sense to make beta adjustment on each pair trade, not on portfolio level.
On each pairtrade you have 2 choices, or you exclude stocks with large beta difference or you position size your trade, according to each stock beta, otherwise you are losing market-neutrality.
I am following the first approach for now.
11 days left in my trial.
13 closed trades 8 of which are winners
Profit £347 at £1/pt spread betting
4 open trades showing £2.40 profit.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
New trade:
Long MFC @ 18.90
Short PRU @ 43.00
In the last 24 hours both MFC and PRU issued earnings. MFC dropped 3% and PRU jumped 20%.
Quote from total_keops:
New trade:
Long MFC @ 18.90
Short PRU @ 43.00
New trade I plan to place at market open tomorrow:
Long FRO
Short SB
neospecialist, I didn't wait any longer after the signal was given, I had it triggered on the day I placed the trade, Im using default settings in pt finder, not sure why you got it earlier.
also with the question about being beta neutral, I only trade dollar neutral, its simple plus it works fine, if one stock has a significantly different beta than the other stock in the pair then that wouldn't be a good pair to trade as they aren't 2 similar stocks.
Closed 2 pair trades for tidy profits
Sold CNMD @ 13.47
Covered SMTS @ 15.17
Sold MA @ 184.99
Covered V @ 66.63
Johnny are you not suffering some noticeable drawdown after placing the MET/PRU trade (as you put trade on before PRU announced earnings).
Or do you intend to add another layer soon?
Quote from jonnysharp:
neospecialist, I didn't wait any longer after the signal was given, I had it triggered on the day I placed the trade, Im using default settings in pt finder, not sure why you got it earlier.
also with the question about being beta neutral, I only trade dollar neutral, its simple plus it works fine, if one stock has a significantly different beta than the other stock in the pair then that wouldn't be a good pair to trade as they aren't 2 similar stocks.
Took ealy profits
Sold MFC @ 19.79
Covered PRU @ 42.83
+3.92% after fees overnight
Expected a bigger move on the downside for PRU after the Stress Test and I am not willing to carry that trade any longer.
Time will tell.
Quote from Mikee:
Johnny are you not suffering some noticeable drawdown after placing the MET/PRU trade (as you put trade on before PRU announced earnings).
Jonny
I took a look at the Pairtrade Finder snapshot provided by neospecialist.
I have a question that is different from his, however.
Right now, the LNN px. is about 1.5 times the BUCY price.
If I wanted to overweight the BUCY price by 1.5 times or by 2.0 times - for whatever reason - would the Pairtrade Finder program be able to analyze the pair with the ratio I dictate?
Or are you only allowed to run it with whatever the prices are for the stocks at the time?
New trade in my scan that looks for overbought/sold patterns, sector play.
Not a correl play.
Playing the 5 minutes chart.
Short FITB @ 8.40
Long FNF @ 15.20
Very risky and will cut it fast if needed.
Closed another trade this morning. So that's 14 trades and 10 winners for a profit of £361. 3 open trades showing a total profit of about £15. All at £1/pt spreadbetting during my 30-day trial.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Mikee, yes that trade is looking a little silly now, could of easily gone the other way, its not having a huge impact on my a/c, win some - lose some, live to fight another day.
Neospecialist, yes thats funny, because Im showing the original signal on the same date as you when I look in the analysis window, I must of entered into the trade, I don't usually do that.
Charlie, Im pretty sure you can't do that in pt finder, most of us trade dollar neutral because of its simplicity and it works fine, interesting concept though.
Closed one trade:
Covered FITB @ 8.12
Sold FNF @ 15.15
+0.8% after fees
I expect FITB to be strong because they dont raise to repay tarp and their peer do so I got out.
Do you guys calculate the P/L % on the amount of one stock or both? I used to do one but I think it's more appropriate on one.
Suppose I go long 1000$ and short 1000$ and make 100$, does it make 10% or 5%?
I'd always calculate my return based on the total amount risked. So, in this instance, it would be 5%.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from jonnysharp:
Charlie, Im pretty sure you can't do that in pt finder, most of us trade dollar neutral because of its simplicity and it works fine, interesting concept though.
what you think about short ebay, long ostk?
Ok, big difference in market cap, anyway seems a a trade with great potencial.
Yes, but the total amount at risk is technically unlimited if you have short stock.
Quote from Dr Who:
I'd always calculate my return based on the total amount risked. So, in this instance, it would be 5%.
Quote from total_keops:
Do you guys calculate the P/L % on the amount of one stock or both? I used to do one but I think it's more appropriate on one.
Suppose I go long 1000$ and short 1000$ and make 100$, does it make 10% or 5%?
Quote from Charlie_Sheen:
You use the actual raw prices for analysis and then adjust to dollar neutral for actual trading ...
For example ... If you have Stock A at $30 and Stock B at $10 - you run (or Pair Trade Finder runs) the analysis simply using the raw prices. No adjustment is made for the 3 to 1 difference in the prices.
After you get your signal(s) you may (for example) buy 100 shares of Stock A and short 300 shares of Stock B to achieve dollar neutrality.
Is this correct?
Quote from tatankas:
what you think about short ebay, long ostk?
Ok, big difference in market cap, anyway seems a a trade with great potencial.
jonnysharp & others- As I understand it, you close the position when it goes back to the mean. Have you thought or backtested other methods of exiting?
Let's say closing the position at one stddev from the opening, at either a profit or a loss. So for a winning trade you are trading from a 2*stdev event to a 1*stdev event, and for a losing trade you are trying to minimise the loss by keeping it to 1stdev away from the opening.
I find that when you do this, a rough figure of 1.5-2% develops as a take gain/stop loss figure on the trade.
I appreciate that this helps generate more drag from commissions, but it also helps curtail losses due to something truly fundamental having happened to the prospects for the pair.
Is it worth backtesting?
Quote from jonnysharp:
I plugged this pair into pt finder, and I tell you what, you have found a great pair to trade, Im going to keep it on my radar, it has a historical 100% win rate with a avg win of $1368 per $10,000 invested and avg trade length of 7.33 days and a wide ranging ratio chart makes this pair a good one. If you have a fundamental bias to short ebay long ostk you may want to wait until the ratio goes to 1.50 or above to initiate a position, the current ratio is 1.43 (ebay stock price is 1.43 times of ostk stock price), 150 day high is 1.54, 150 day low is 1.09, avg is about 1.30, see attached.
Quote from tradingtrading:
jonnysharp & others- As I understand it, you close the position when it goes back to the mean. Have you thought or backtested other methods of exiting?
Let's say closing the position at one stddev from the opening, at either a profit or a loss. So for a winning trade you are trading from a 2*stdev event to a 1*stdev event, and for a losing trade you are trying to minimise the loss by keeping it to 1stdev away from the opening.
I find that when you do this, a rough figure of 1.5-2% develops as a take gain/stop loss figure on the trade.
I appreciate that this helps generate more drag from commissions, but it also helps curtail losses due to something truly fundamental having happened to the prospects for the pair.
Is it worth backtesting?
Quote from Paulo33:
I have only 63.08% correlation for that pair, isn`t too low?
No way.
It's the third or fourth time, co-integration is mentioned.
Personally i trust on backtest results, as a way to measure how strong is the pair.
What i have read about co-integration (Johansson, Dickey Fuller ...), is not easy to understand for someone without a statistical background.
Also, I doubt it's possible to calculate co-integration in mili-seconds, like you calculate correlation.
When you need to analyze hundreds of pairs, the pairs indicators should be calculated on the fly.
Quote from jonnysharp:
I plugged this pair into pt finder, and I tell you what, you have found a great pair to trade....
Quote from tatankas:
Are you backtesting with PTF?
Try to backtest also with 0.5*stddev.
In my opinion, it also makes sense to consider a maxim holding time.
Any thoughts on this subject guys?
Quote from tatankas:
No way.
It's the third or fourth time, co-integration is mentioned.
Personally i trust on backtest results, as a way to measure how strong is the pair.
What i have read about co-integration (Johansson, Dickey Fuller ...), is not easy to understand for someone without a statistical background.
Also, I doubt it's possible to calculate co-integration in mili-seconds, like you calculate correlation.
When you need to analyze hundreds of pairs, the pairs indicators should be calculated on the fly.
Quote from CBuster:
careful jonny. not sure how far back you like to backtest, or how far PTF can go, but this spread has not always been so stable. Back in 07/08 the spread ratio tripled (from 1.0 to 3.0) in a couple of months, near straight line then came all the way back even quicker a few months later. only going long OSTK would only have saved you from enduring the 2nd move.
Quote from saico:
I think the trade quality of pairs always changes. Therefore I think a shorter backtesting period (12 months) has more weight than a wider timeframe. For myself I update my list about every 3 months.
Quote from CBuster:
i agree. but the trouble with spreads like this one (normally with one stock v small compared to the other) is that they look good until they blow out, then they look terrible. there is no "warning period" where the quality of the spread slowly deteriorates. instead you just get raped as the small stock doubles or halves in value whilst the larger stock does its own thing.
either way, wish you luck
Quote from saico:
Thats the risk you're going to take if you're in the business. Its on you to manage that risk properly. For myself PT is the most stable and less risky approach I found so far and I'm very happy and confident with it.
Quote from CBuster:
sure. i'm not a trading (or pairtraiding) naysayer. i trade full-time, including some pairs stuff. risk is all part of the game. my only question is whether pairs like this particular one (ebay / ostk) represent good risk reward. but that's down to the individual i guess.
I don't want to get in a heated debate about co integration vs correlation, as I can see the merits of both, and as some have mentioned co integration is more complicated and a bit harder to understand, however most of us here are using correlation and it seems to be working fine. Can someone here please show an example of a highly correlated pair which has low co integration? would be interesting to look at.
Like someone said you can't rely purely on the statistical relationship to cover your back, you gotta apply some common sense, that's what makes a good trader, identifying situations the computer can't.
Quote from tatankas:
Also, I doubt it's possible to calculate co-integration in mili-seconds, like you calculate correlation.
When you need to analyze hundreds of pairs, the pairs indicators should be calculated on the fly.
Quote from total_keops:
Dont worry about that. Everyday I take over 1550 stocks and analyse all possible pairs combination (over a million). I can do that in about 40 seconds with an unoptimised code.
Quote from renton:
Hi total - how do you do this? I've been looking at PTF 30 day trial for a few days now (no trades but simply curious) and it seems to take a good 10 mins to spot pairs given about 20 Stock Symbols (running on a mid-range PC)
Are you using PTF as well? Or simply your own algorithms / programs?
Quote from jonnysharp:
I don't want to get in a heated debate about co integration vs correlation, as I can see the merits of both, and as some have mentioned co integration is more complicated and a bit harder to understand, however most of us here are using correlation and it seems to be working fine. Can someone here please show an example of a highly correlated pair which has low co integration? would be interesting to look at.
Quote from jonnysharp:
I plugged this pair into pt finder, and I tell you what, you have found a great pair to trade, Im going to keep it on my radar, it has a historical 100% win rate with a avg win of $1368 per $10,000 invested and avg trade length of 7.33 days and a wide ranging ratio chart makes this pair a good one. If you have a fundamental bias to short ebay long ostk you may want to wait until the ratio goes to 1.50 or above to initiate a position, the current ratio is 1.43 (ebay stock price is 1.43 times of ostk stock price), 150 day high is 1.54, 150 day low is 1.09, avg is about 1.30, see attached.
Quote from saico:
I think the trade quality of pairs always changes. Therefore I think a shorter backtesting period (12 months) has more weight than a wider timeframe. For myself I update my list about every 3 months.
Closed a few trades today which means I've now closed 19 trades, 6 of which have been losers (31%) for a total profit of £472. I have 2 trades open (from yesterday) for a nett loss of £6.30.
All to £1/pt while I'm going through my 30-day trial.
And I'm now quite pleased and have modified my filters for opening trades which has led to an increase in my winning percentage. But of course we're dealing with small numbers here, although its looking promising.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
Closed a few trades today which means I've now closed 19 trades, 6 of which have been losers (31%) for a total profit of £472. I have 2 trades open (from yesterday) for a nett loss of £6.30.
All to £1/pt while I'm going through my 30-day trial.
And I'm now quite pleased and have modified my filters for opening trades which has led to an increase in my winning percentage. But of course we're dealing with small numbers here, although its looking promising.
Quote from tatankas:
Yep, i agree on that, we shouldn't forget our average holdin period is around 7 days.
What you think about the following backtest indicator:
Imagine today is 2009 january the first:
X=backtest from 1-Jully-2008 until 31-December-2008
y=backtest from 1-Jan-2008 until 30-June-2008
w=backtest from 1-Jan-2007 until 31-December-2007
backtest_score=0.5*X+0.25*Y+0.25*W
From you personal experience, it makes sense?
Quote from Dr Who:
Closed a few trades today which means I've now closed 19 trades, 6 of which have been losers (31%) for a total profit of £472. I have 2 trades open (from yesterday) for a nett loss of £6.30.
.
Yes, the winning %age is 69% and the win/loss ratio is 3.5
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
I've noticed a strange occurance with my portfolio of pairs.
Even though I am following Johnny's suggestions, and trading dollar neutral, so i'm short and long an equal number of equities and $$ figure, my portfolio seems to either stand still or creep forward an inch during positive days, or bound ahead on negative days. (sentiment determined by the closing price of the major indexes).
I have only just recommenced trading, so I'm only talking about 2-3 weeks of data, but it's quite peculiar.
Adrian
Quote from cipherscribe:
I've noticed a strange occurance with my portfolio of pairs.
Even though I am following Johnny's suggestions, and trading dollar neutral, so i'm short and long an equal number of equities and $$ figure, my portfolio seems to either stand still or creep forward an inch during positive days, or bound ahead on negative days. (sentiment determined by the closing price of the major indexes).
I have only just recommenced trading, so I'm only talking about 2-3 weeks of data, but it's quite peculiar.
Adrian
Hi Tatankas,
Quote from tatankas:
Interesting.
Are you taking note of stocks beta?
Can you calculate average beta for short and long sides?
How many pairs are you holding?
Quote from cipherscribe:
Hi Tatankas,
No, no note of betas. It's not one of my filters, but occasionally I will check when something else looks a bit awry - like larger than normal price differences between the pairs.
I'm currently holding 6 pairs.
Adrian
I figured I'd add them up just for the hell of it and see. The beta's average higher on the longs than the shorts (Yahoo data).....
Quote from tatankas:
If, your short-side beta is much larger than your long-side, you are losing market-neutrality, and in fact, betting that the markets will decline (what seems a good option, right now :-) ).
Can you get the beta((from yahoo) for your short stocks, and compare with your long stocks beta?
A beta unbalanced portfolio, is perfectly good explanation, in my opinion.
Busy day and only 5 days to go in my 30-day trial.
Closed 21 trades in all with 67% winners. Total profit £483. 5 open positions, all winners at the moment to the tune of £30.80. All to £1/pt spreadbetting...
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
IAP.L/TLPR.L & AGU/POT in play
Hello. Just wanted to be the 1000th reply
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Passed XLNX/NVDA.
Went long into AGU/POT at 0.4372 even though it did not pop into my scanner (It should have).
Closed 2 trades for nice profits, portfolio at all time high.
Sold JBHT @ 25.66
Covered KNX @ 16.09
Sold TNP @ 18.91
Covered OSG @ 31.43
New trade
Long ZEUS @ 16.51
Short SIM @ 5.64
Great!
Great job. i have you at over 150% IRR or something ridiculous like that.
FYI I'm still running > 80% IRR but my selections don't seem to make as much money as yours per trade.
But, here's something i just noticed today the last 17 trades I closed were all winners! Now I'll jinx myself.
My oldest few open ones which are typically bigger losers arn't doing bad either. Maybe i'm learning!
Mike
Quote from jonnysharp:
Closed 2 trades for nice profits, portfolio at all time high.
Sold JBHT @ 25.66
Covered KNX @ 16.09
Sold TNP @ 18.91
Covered OSG @ 31.43
New trade
Long ZEUS @ 16.51
Short SIM @ 5.64
Quote from neospecialist:
When did you enter the TNP/OSG trade? I see no signal on PTF for it in recent weeks.
Did anyone here backtested:
a. Time stop (always exiting trades if they have not reached the mean after n days, e.g. n=6 or n=8) .
b. Stoploss based on standard deviation, or percentage loss, or other criteria.
In the past I have analyzed a number of past trades and seemed to me that an overall time stop (would have improved results, but I did not look at enough trades to be statistically significant, and I do not have the tools or ability to program a backtest.
Quote from saratur:
Did anyone here backtested:
a. Time stop (always exiting trades if they have not reached the mean after n days, e.g. n=6 or n=8) .
b. Stoploss based on standard deviation, or percentage loss, or other criteria.
In the past I have analyzed a number of past trades and seemed to me that an overall time stop (would have improved results, but I did not look at enough trades to be statistically significant, and I do not have the tools or ability to program a backtest.
Just a question - is there any noticeable differences in terms of performance / risk in doing pair trading on a CFD account as compared to a spread betting account? Any thoughts at all?
Quote from total_keops:
You can use the search function(OSG,jonnsharpe)
04-30-09 02:27 AM
Quote from thetrendfollowe:
Im actually in the process, brother.
Im trialling a triple exit system.
Im entering at 10% divergence.
Adding to both positions at 15%.
EXIT either at:
1/ Reversion to the mean
2/ Maximum stop loss at 20% (that should never or very rarely get hit - pretty much a disaster stop)
3/ And time based exit after X number of days. I will have to optimise which X works best.
(Whichever comes first)
I will post the results here as they become available, hopefully in the next several weeks.
Has anybody else trialled similar sorts of exits?
Particularly time-based?
Quote from neospecialist:
I did not doubt your trade but there seems to a software problem with PTF.
The PTF software has different numbers now than the screenshot that you submitted on 4/30. They are now showing no signal on that day. Have you ever noticed this before?
I was just going to email them about a similar issue. I've noticed that I sometimes get different messages for pairs at different times I open the software. Not quite certain how this works out but can only assume intra-day prices can fire off the entries and exits.
That said it happens rarely enough for me for it not to be a problem. And in any case, I usually have PTF open most of the trading day...
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
New trade,
short BDX @ 65.90
long BCR @ 71.68
Passed the following: BGC:ENS (earnings guidance), CPRT:KMX (correl) and TXN:ADI (ADI earnings soon).
Quote from tatankas:
Backtesting has one problem.
Probably your backtest will consider trades triggered by news specific to a particular stock.
I guess you will not enter a trade, when the deviation is justified by recent news, but your backtest will consider that trade, and somehow corrupt the final results.
Closed 1st losing trade in awhile
Sold TRE @ 3.23
Covered GFI @ 12.40
A classic early close:
Sold AGU @ 48.55
Covered POT @ 109.80
+1% net on the ratio (0.5% on total cash)
Closed to 1/3 of my target, I will have to learn to hold.
Live Data
Hi all- Great Chatter in here; love it...some good ideas floating around I hope to add some soon...
Question - Is anyone using Live Data on thier PTF; and if so can you share how to set it up? I have mine refreshing every 300 seconds but it has not been working properly over the last few days...
Does anyone have any suggestions?
Thanks
2 new trades
Short MOO/IGE @ 1.2675, target 1.2. ETF play.
Short TXN/ADI @ 0.9058, target 0.85. Couldn't resist even with the ADI earnings coming.
Any thoughts on the pair UTEK(long)-XXIA(short) ?
I'm finding that PTF appears to have appalling customer service. I emailed them about a few issues I thought the app had. No reply. I even tried to buy it but they use Share-It and they wouldn't accept what they called a 'free' email address used with my PayPal account. I emailed PTF about it. No reply.
Fine, if that's how good their support is, I have no qualms about running another month free trial using a different IP address I have.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
I'm finding that PTF appears to have appalling customer service. I emailed them about a few issues I thought the app had. No reply. I even tried to buy it but they use Share-It and they wouldn't accept what they called a 'free' email address used with my PayPal account. I emailed PTF about it. No reply.
Fine, if that's how good their support is, I have no qualms about running another month free trial using a different IP address I have.
A couple of interesting observations.
I've now got 2 PTFs running (on 2 separate IP addresses) with the same pairs loaded and they come up with quite different correlations. One may be in a trade while another is watching. Ones natural inclination would be that both instances would be showing the same figures, especially as my setup for them both is the same.
Also a couple of days ago I came across another app called 'Pairs Trade' which I downloaded a trial of. Its their 'Gold Edition', so I've no idea what their 'Bronze Edition' must be like because this one has hardly any functionality at all. And the interesting thing is here is that their pair correlations bear absolutely no relationship with those of PTF. So we must be talking about a different type of correlation altogether, or a correlation taken over very different time frames (though I think its the same).
Anyway, it would be interesting to hear from those with more experience of pairs trading than I.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
I'm finding that PTF appears to have appalling customer service. I emailed them about a few issues I thought the app had. No reply. I even tried to buy it but they use Share-It and they wouldn't accept what they called a 'free' email address used with my PayPal account. I emailed PTF about it. No reply.
Fine, if that's how good their support is, I have no qualms about running another month free trial using a different IP address I have.
Hello guys!
Thank you for a good thread.
Sorry I interrupt your conversation, but I just wanted to hear a comment from anyone in the biz.
I trade mostly stocks, but I used to be trading forex earlier..
When I came up to this thread and saw you guys looking for correlated stocks which intend to come back to their mean I remembered currency pairs..
So what I did is the following:
* Exported H1 data since 2008.01.01 from metatrader GBP/JPY and AUD/JPY
* Their relation is 97 procent correlated
* As GBP/JPY / Aud/JPY = GBP/AUD I can follow this pair as a ratio between gbpjpy and audjpy
* I took a MA and counted the spread of ma and high/low to see its average/max/min deviation and based on that I also programmed in excel that I would enter the trade (short/long) everytime rate will goes away from MA more than 80 points and close it as soon as it hits MA
results are these:
winning trades 870
loosing trades 322
winning average 44 points
loosing average 90 points
The whole thing produced pretty good results, I think period of backtest i long enough
I want your comments on this...
Can I use MA on GBPAUD as you use Mean on your ratio?
Whats the period of the Mean you use (if its the same)?
Waht do you think all in all about it
Any other inputs...
thanks
D.
__________________
The hardest thing is to make an easy living.
Quote from stockboy201:
hi DR who, with the trial version of PTF is there any difference w/ the full version? IE funtionality
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
A couple of interesting observations.
I've now got 2 PTFs running (on 2 separate IP addresses) with the same pairs loaded and they come up with quite different correlations. One may be in a trade while another is watching. Ones natural inclination would be that both instances would be showing the same figures, especially as my setup for them both is the same.
Also a couple of days ago I came across another app called 'Pairs Trade' which I downloaded a trial of. Its their 'Gold Edition', so I've no idea what their 'Bronze Edition' must be like because this one has hardly any functionality at all. And the interesting thing is here is that their pair correlations bear absolutely no relationship with those of PTF. So we must be talking about a different type of correlation altogether, or a correlation taken over very different time frames (though I think its the same).
Anyway, it would be interesting to hear from those with more experience of pairs trading than I.
Interesting approach Ivan. I'll take a look.
Meanwhile, I think I understand why my figures are different for the different instances of PTF. My main PC has PTF open all day and therefore has intraday data whilst my other one only has PTF with EOD data. So I can understand why there will be differences.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
...I've now got 2 PTFs running (on 2 separate IP addresses) with the same pairs loaded and they come up with quite different correlations. One may be in a trade while another is watching. Ones natural inclination would be that both instances would be showing the same figures, especially as my setup for them both is the same...
Quote from goldenglen:
...Can I use MA on GBPAUD as you use Mean on your ratio?
Whats the period of the Mean you use (if its the same)?
Waht do you think all in all about it
Any other inputs...
Database Setup Error.
Hi all,
I'm about to install PTF on my notebook. Unfortunately I got some issues creating a database caused by a SQL DB error. The error message is like ''Unable to open ''pairTradeFinder'' data base. Logon error...''
If anyone experienced the same problems and was able to solve it please let me know. Any help would be much appreciated.
All trouble shooting recs by PTF have been done. Unfortunately without any success.
Thanks in advance
saico
Well, time to bite the bullet and get a bit more serious with my pair trading.
I spent some money over the weekend and bought PTF although I still have some reservations about certain parts of the app. However, support finally emailed me and gave me the impression that they were working towards sorting some of the issues out. I still think its one of the best pairs trading apps out there so lets hope they dont stop developing it. It can only be to their advantage.
I also bought a couple more books - " Statistical Arbitrage etc by A. Pole " and " Pairs Trading etc by Vidyamurthy ". I bought Rob Friesen's book " The art of the arb " a couple of years back and it was that that got me into this in the first place. I dont have Rob's book as an ebook but the other two are and if anyone wants a copy just email me at drwho88888 at yahoo.com. They cost me around $160 for the two and I'll happily send you the pdfs for $20 to mitigate my outlay.
Today I've also upped my trading and I'm now betting £10/pt rather than £1/pt during my PTF trial (up over £500 during my PTF trial). I'm pretty convinced that I can carry forward my previous success into the future.
Best of luck to you all, especially jonnysharp. I'll pop back every now and then to see how you're all going and to post my experiences. Have fun.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
I am interested on Rob Friesen's book "Art of the arb ", if anyone wanna sell it at a reasonable price please PM
I'm now quite keen to maximise my profits by being able to get the best value when I buy and sell and so would appreciate any thoughts from those who are based in the UK as I generally trade UK stocks.
There seems to be 2 realistic ways to trade. CFD's and Spreadbetting. At the moment I'm spreadbetting with Tradefair. I've also got accounts with CMC and IG. At the moment Tradefair are quoting 134.3 - 134.5 for Bodycote and 1310.3 - 1316.7 for Dana Oil as way of an example.
Can anyone post what markets they've found to be the best for this type of trading with a couple of examples of prices.
Thanks
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
I'm now quite keen to maximise my profits by being able to get the best value when I buy and sell and so would appreciate any thoughts from those who are based in the UK as I generally trade UK stocks.
There seems to be 2 realistic ways to trade. CFD's and Spreadbetting. At the moment I'm spreadbetting with Tradefair. I've also got accounts with CMC and IG. At the moment Tradefair are quoting 134.3 - 134.5 for Bodycote and 1310.3 - 1316.7 for Dana Oil as way of an example.
Can anyone post what markets they've found to be the best for this type of trading with a couple of examples of prices.
Thanks
Yes, CMC and Tradefair seem comparable usually. IG seem to have wider spreads but I'm wondering how the CFD guys fare. Is this a better way to go ?
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
There seems to be 2 realistic ways to trade. CFD's and Spreadbetting.
Thanks tradingtrading. I had a suspicion that this may be the case. I'll look into a little more and will open the necessary CFD accounts for future trades.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
tradingtrading is right.
i trade here in london - US, UK, European stocks. given you are getting serious and starting to play with more significant money, i would switch to trading the underlying stocks or swaps / cfd's based on them.
personally, I would look for a reputable broker and trade the stocks (if not UK or Swiss) and the swap otherwise. this gives you access to the full range of order types and proper agency execution vs whatever the spreadbet firm feels like offering at the time.
Quote from CBuster:
tradingtrading is right.
i trade here in london - US, UK, European stocks. given you are getting serious and starting to play with more significant money, i would switch to trading the underlying stocks or swaps / cfd's based on them.
personally, I would look for a reputable broker and trade the stocks (if not UK or Swiss) and the swap otherwise. this gives you access to the full range of order types and proper agency execution vs whatever the spreadbet firm feels like offering at the time.
Quote from renton:
Damn! And here I am setting up my Spread Betting account! Well - i'm going to give the Spread Bets a go (contrary to the good advice here). I suppose I need to start small and make my own mistakes though and see how I do. If I make 100 quid profit in a month - then thats really good in my book!
Just opened an account with IG Markets.
Yes, the difference is fairly plain now.
Tradefair (Bodycote): 135.3 - 136.2
IG: 135.0 -135.75
Tradefair (Dana): 1303.7 - 1309.3
IG: 1306.0 - 1308.0
Every little extra helps
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Just had another look and these are the quotes for Dana Oil now:
Tradefair: 1297.3 - 1304.7
IG : 1313 -1315
Surely arbing between these two markets should be possible too ?
Mmmmm, will have to monitor this....
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Dr Who, how many stocks are there in London that are decent for pairs trading? I mean average daily volume over 500k, Market cap over 200 million and stock price over 5$ Or something around that.
I only trade those in similar sectors that are in the FTSE 100 or 250.
I am watching 68 pairs but some are being culled along the way as I get to know them a little more intimately.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from total_keops:
Dr Who, how many stocks are there in London that are decent for pairs trading? I mean average daily volume over 500k, Market cap over 200 million and stock price over 5$ Or something around that.
Now Dana is trading
Tradefair: 1311 - 1315
IG : 1303 - 1305
This is most strange and worthy of looking into. Does anyone else know anything about arbitrage between spreadbetting companies and CFD's ?
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
OK, I understand why the discrepency in prices now. That's me jumping the gun.
For some reason the prices shown on the IG Markets interface are delayed 15 mins and its only when you open a ticket and put in a quantity that you can see the 'live' prices for that CFD. Weird idea but at least it shows their very small spread.
1p compared to Tradefair's 4-5p. And there was me getting all excited
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Got our of TXN/ADI @ 0.89 for a tiny profit after fees. Pocket change.
Did not want to ride it over the ADI earnings.
The downside with the IG Markets CFD account is that in order to overcome their minimum commission of £10 at either end, you need to be trading in some reasonably substantial numbers.
I estimate you need to be buying at least 1000 shares of around £8 or so each which would require a margin of around £2000. So, for each pair you'd need a margin of around £4000. So, to be actively trading 5 pairs a day, with each lasting in the region of 9 days say, you may have to finance 80 or more margins at any one time. This means an account of around £160,000.
Perhaps jonnysharp or any others who actively trade CFD pairs could let me know how their numbers compare.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
The downside with the IG Markets CFD account is that in order to overcome their minimum commission of �10 at either end, you need to be trading in some reasonably substantial numbers.
I estimate you need to be buying at least 1000 shares of around �8 or so each which would require a margin of around �2000. So, for each pair you'd need a margin of around �4000. So, to be actively trading 5 pairs a day, with each lasting in the region of 9 days say, you may have to finance 80 or more margins at any one time. This means an account of around �160,000.
Perhaps jonnysharp or any others who actively trade CFD pairs could let me know how their numbers compare.
Quote from Dr Who:
The downside with the IG Markets CFD account is that in order to overcome their minimum commission of £10 at either end, you need to be trading in some reasonably substantial numbers.
I estimate you need to be buying at least 1000 shares of around £8 or so each which would require a margin of around £2000. So, for each pair you'd need a margin of around £4000. So, to be actively trading 5 pairs a day, with each lasting in the region of 9 days say, you may have to finance 80 or more margins at any one time. This means an account of around £160,000.
Perhaps jonnysharp or any others who actively trade CFD pairs could let me know how their numbers compare.
Sure, I think 5 may be too many to hope for. My own pairs seem to provide me with about 3 pr day on average. But with the average trade lasting about 9 days that would mean 27 pairs or 54 CFDs open at one time maximum. This still means around £100K account.
So, its a balancing act if you have say a £50K account like I do. Do I trade less frequently but at better prices aka CFDs or do I trade more often but at a lower volume (thereby spreading my risk) but at poorer prices aka spreadbetting ?
The problem going the CFD route too is that ones exposure is going to be that much larger if things go the wrong way and its more likely I'd jump ship because of the heat generated.
If IG Markets didnt have the £10 minimum commission at either end I'd definitely go the CFD route. Tradefair will be opening a CFD exchange in a few months time and I've been invited to beta test it, so it'll be interesting to see what they have to offer. If they arrange it in a similar way to their mother exchange, Betfair, it could be a real alternative to what we have on offer at the moment.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
Sure, I think 5 may be too many to hope for. My own pairs seem to provide me with about 3 pr day on average. But with the average trade lasting about 9 days that would mean 27 pairs or 54 CFDs open at one time maximum. This still means around £100K account.
So, its a balancing act if you have say a £50K account like I do. Do I trade less frequently but at better prices aka CFDs or do I trade more often but at a lower volume (thereby spreading my risk) but at poorer prices aka spreadbetting ?
The problem going the CFD route too is that ones exposure is going to be that much larger if things go the wrong way and its more likely I'd jump ship because of the heat generated.
If IG Markets didnt have the £10 minimum commission at either end I'd definitely go the CFD route. Tradefair will be opening a CFD exchange in a few months time and I've been invited to beta test it, so it'll be interesting to see what they have to offer. If they arrange it in a similar way to their mother exchange, Betfair, it could be a real alternative to what we have on offer at the moment.
At the moment I'm using their DMA interface which seems to be working OK and I can usually get inside the spread without a problem. Then again, I've only done a few so far. I like to be fairly active so I think I will probably take a slightly less advantageous price in order to trade more pairs and go the spreadbetting route for the moment. Until the new Tradefair exchange starts up and I see what they have to offer. Its horses for courses and I dont think I'm funded well enough at the moment to trade the way I'm happy with going the CFD route.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
While I'm talking about their DMA interface I was watching a couple of CFDs just after the open and it seemed like there was a bot or two working the spreads when they were wide enough. This is what I do for my main income at the moment but on Betfair markets, so its interesting to see the CFD markets are not immune to the same practice
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
Sure, I think 5 may be too many to hope for. My own pairs seem to provide me with about 3 pr day on average. But with the average trade lasting about 9 days that would mean 27 pairs or 54 CFDs open at one time maximum. This still means around £100K account.
So, its a balancing act if you have say a £50K account like I do. Do I trade less frequently but at better prices aka CFDs or do I trade more often but at a lower volume (thereby spreading my risk) but at poorer prices aka spreadbetting ?
The problem going the CFD route too is that ones exposure is going to be that much larger if things go the wrong way and its more likely I'd jump ship because of the heat generated.
If IG Markets didnt have the £10 minimum commission at either end I'd definitely go the CFD route. Tradefair will be opening a CFD exchange in a few months time and I've been invited to beta test it, so it'll be interesting to see what they have to offer. If they arrange it in a similar way to their mother exchange, Betfair, it could be a real alternative to what we have on offer at the moment.
Why not going with a real brokerage firm?
Trade exited yesterday
Sold ALL @ 25.85
Covered CNA @ 14.72
Closed two pairs;
BDX:BCR @ 0.9031 from 0.9194
MOO:IGE @ 1.2810 from 1.2675, took a loss because they are ETFs on different industry and it seems more like a divergence.
Exited trade for small profit
Sold AXS @ 24.63
Covered PRE @ 67.08
Just took that one.
Quote from Dr Who:
Sure, I think 5 may be too many to hope for. My own pairs seem to provide me with about 3 pr day on average. But with the average trade lasting about 9 days that would mean 27 pairs or 54 CFDs open at one time maximum. This still means around £100K account.
So, its a balancing act if you have say a £50K account like I do. Do I trade less frequently but at better prices aka CFDs or do I trade more often but at a lower volume (thereby spreading my risk) but at poorer prices aka spreadbetting ?
The problem going the CFD route too is that ones exposure is going to be that much larger if things go the wrong way and its more likely I'd jump ship because of the heat generated.
If IG Markets didnt have the £10 minimum commission at either end I'd definitely go the CFD route. Tradefair will be opening a CFD exchange in a few months time and I've been invited to beta test it, so it'll be interesting to see what they have to offer. If they arrange it in a similar way to their mother exchange, Betfair, it could be a real alternative to what we have on offer at the moment.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Quote from saico:
Just took that one. COL:LMT
PTF sent out a freebie this morning for AYE/GXP. I took it as I do trade pairs now and again and am looking to do more of them. The trade is up nicely so far as AYE is recovering from a beatdown and GXP is doing its usual shuffle around the $15 area.
My question is this: Even though I took this trade and its working, I was ready to discard it because of the recent price action of AYE. Those of you with more experience on this thread, you do see that this is not a normal divergence, no? This seems to be a spread that went way out of whack only because one of the stocks got destroyed.
In general, am I correct to be shy of these types of pair setups?
__________________
Never settle.
Quote from Midas:
You should look into a prop fiim. 50k would give you 1mm + buying power.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
I tentatively opened an account with IB a few weeks ago but havent yet funded it. Perhaps I'll do that. They seem fairly popular and have a well established API which I like.
What IB calls portfolio margin is the ability to have additional margin, up to 6x. With amounts less than $100,000 you can have regular RegT margin of 2x overnight or 4x intraday. In addition, IB's UI is well suited to pair trading, although you can't place a limit order for pairs (yet). Last, IB treats pair trading very favorably, essentially requiring margin for only the long side, unlike TS where magin requirements are a lot higher. Sorry for the commercial, but I'm a big fan
Quote from tatankas:
From IB WebSite:
"An account must have at least USD 100,000 (or USD equivalent) in Net Liquidation Value to be eligible for a Portfolio Margin account"
With less than 100k i think you have to open a cash account, where you does not have the option to use margin, when trading stocks.
There are plenty of IB users on this forum, correct me if I am wrong, plz
__________________
Happy here and now!
Quote from tatankas:
From IB WebSite:
"An account must have at least USD 100,000 (or USD equivalent) in Net Liquidation Value to be eligible for a Portfolio Margin account"
With less than 100k i think you have to open a cash account, where you does not have the option to use margin, when trading stocks.
There are plenty of IB users on this forum, correct me if I am wrong, plz
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Hey Jonny, just wondering whether you are still running MET/PRU ?
Im still in this trade and im half-minded to exit at a loss.
had previous good results with the pairs but been out of it for a wee while after evaporating a lot of profits last May.
this post has inspired me to get back into it
am getting into positions with the thought that if they go against me, i will add a couple of layers to them up to the stop.
Long MCD short YUM
long CVX short XOM
long APC - short OXY anywhere under -5 with a 1.3:1 ratio
long T - short VZ
long HCN - short HCP
and a few others. just wanted to see if anyone has any ideas about these as i didn't see them in the 10 or so pages of posts i looked through nor have i been able to succesfully download the PTF.
Thanks so much for any words.
Quote from Podimer:
...
and a few others. just wanted to see if anyone has any ideas about these as i didn't see them in the 10 or so pages of posts i looked through nor have i been able to succesfully download the PTF.
Thanks so much for any words.
Quote from total_keops:
Sorry to tell you that but to me they all look crappy. Do you have any reson for your pairs selection? You dont seem to apply what we do here; mean reversion on correlated pairs that move 2-3 stdev away from the mean. I'm also not a big fan of averaging down, but that's personal to you.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
KMB/PG in play
Quote from total_keops:
Sorry to tell you that but to me they all look crappy. Do you have any reson for your pairs selection? You dont seem to apply what we do here; mean reversion on correlated pairs that move 2-3 stdev away from the mean. I'm also not a big fan of averaging down, but that's personal to you.
Quote from Podimer:
thanks a lot for the somewhat constructive criticism (i am a bit of a coprophile so am delighted with "crappy";-)
i am perhaps from a different school of pairtrading (as Midas seemed to have been so kindly referring to in my defense) and it may be a bit much to ask but would you mind referring me to a post that explains your style of pairtrading in a slightly more detailed way so that i may learn something new to hopefully make a little extra loot?
my reasoning for those pairs is their correlation, both fundamentally and technically, the latter implying that there is a reliable/tradeable mean reversion. as for the 2-3 standard deviation moves out from the mean, take a look at APC - OXY or even the T - VZ for the necessary volatility, if that is what the purpose of the deviation is?
sure, MCD - YUM has been a bit of a trender lately so that may not be great for a 5-7 day swing, which i get the idea is the ideal time frame for you guys?
do you just get in with one layer then have in a mental stop at a particular spread price with a corresponding profit target spread price exit? i was looking at your BDX:BCR pair posted a couple of days ago and assume it may be like that as there has been rather huge spread moves in it moving over 15 points in the past 3 months thus lots of risk, no? volatility in the spreads is necessary for obvious reasons and from what i have read, it seems as if most of you guys have pretty tight risk management so i am sure that aspect is covered?
anyway, any teaching on what you are doing would be most welcomed and if not, just continue the posts and i will try to figure it out by analyzing the pairs you guys put on.
Thanks again and best of luck flaying the market
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Quote from Midas:
They use pair trade finder (software) and have been doing quite well with it. I check in time to time but have not been involved with the discussion and do not use the software. I trade mean reversion a little more discretionary and less mechanical. It is a good thread. Look in the 1st 10 pages for a discription of what signals they look for.
BTW, I have been putting on a first leg in hcn - hcp around this area (11). The past year has been good for that pair. The only other pair I like, that you listed is 1.3apc - oxy but not at this price.
Good luck.
Podimer,
Many people trade cvx - xom but it does not fit my perameters. I have a list (that has grown to around 50 pairs) that I have selected by their tendency to jig (slang for trade in a well defined range and move back and forth in price often).
I usually always layer in with my max size being all layers combined. I determine the max size by the amount the pair moves and use an extreme print in the past as a mental stop. If you layer ALWAYS have an exit plan in place and do not get to big in any one pair. If you use leverage things can and will stay irrational longer than you can stay liquid at some point. Don't be stuborn, expect to take losses. They are part of the game.
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
2 new trades;
Long NU:UGI @ 0.8533
Short AMP:EV @ 1.0967
And another one "outside the box", Short MFC: NPBC. Much more risky and not a correl play.
Podimer, I will try to explain my parameters tonight. Time to go jogging.
Quote from total_keops:
2 new trades;
Long NU:UGI @ 0.8533
Short AMP:EV @ 1.0967
And another one "outside the box", Short MFC: NPBC. Much more risky and not a correl play.
Podimer, I will try to explain my parameters tonight. Time to go jogging.
New trade, entry signal was produced on Monday, don't normally enter trades after 1st signal, however this one has diverged even more and looks overstretched.
Long PNW @ 25.74
Short EDE @ 15.47
Quote from Podimer:
would you mind referring me to a post that explains your style of pairtrading in a slightly more detailed way so that i may learn something new to hopefully make a little extra loot?
my reasoning for those pairs is their correlation, both fundamentally and technically, the latter implying that there is a reliable/tradeable mean reversion. as for the 2-3 standard deviation moves out from the mean, take a look at APC - OXY or even the T - VZ for the necessary volatility, if that is what the purpose of the deviation is?
sure, MCD - YUM has been a bit of a trender lately so that may not be great for a 5-7 day swing, which i get the idea is the ideal time frame for you guys?
do you just get in with one layer then have in a mental stop at a particular spread price with a corresponding profit target spread price exit? i was looking at your BDX:BCR pair posted a couple of days ago and assume it may be like that as there has been rather huge spread moves in it moving over 15 points in the past 3 months thus lots of risk, no? volatility in the spreads is necessary for obvious reasons and from what i have read, it seems as if most of you guys have pretty tight risk management so i am sure that aspect is covered?
anyway, any teaching on what you are doing would be most welcomed and if not, just continue the posts and i will try to figure it out by analyzing the pairs you guys put on.
Quote from total_keops:
Unfortunately, I can't really teach anything but I also like to share my trades so we can see what others are doing and see if it can help us. And also, I'ts good for the motivation
Quote from Midas:
Podimer,
Many people trade cvx - xom but it does not fit my perameters. I have a list (that has grown to around 50 pairs) that I have selected by their tendency to jig (slang for trade in a well defined range and move back and forth in price often).
I usually always layer in with my max size being all layers combined. I determine the max size by the amount the pair moves and use an extreme print in the past as a mental stop. If you layer ALWAYS have an exit plan in place and do not get to big in any one pair. If you use leverage things can and will stay irrational longer than you can stay liquid at some point. Don't be stuborn, expect to take losses. They are part of the game.
Things are still going well for my mixture of trading CFDs and spreadbetting.
I've also discovered that trading index pairs is working well too. I wasn't sure how to create a group for these so I emailed PTF and they told me to create a new NYSE group and put the indices in as per Yahoo i.e. FTSE as ^FTSE, Dow as ^DJI etc.
I've been doing well with these the last few days and thought I'd pass it on.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Dr Who
can you share those index pairs that you did well?
thanks
DJI v FTSE
DJI v DAX
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
DJI v FTSE
DJI v DAX
Dr Who, I find that spreadbetting cos arent always able to quote the price of certain stocks online.
EDE (Empire District) is a good example. IG dont quote this via spreadbetting. However, they may do via their CFD platform.
Out of my MFC/NPBC in the first minutes. From 3.44 to 3.22 o/n.
OUT of my AMP:EV @ 1.09 from 1.0967
I tried to get a better fill yesterday and made it wost so I'm flat on the trade. Small loss after fees.
Also, I expected a bigger gap on the open and I am not willing to ride without that cushion.
lol, and another one.
Out NU:UGI @ 0.86 from 0.8533.
±Flat after fees.
Quote from Dr Who:
DJI v FTSE
DJI v DAX
Exited trade
Sold PBNY @ 8.00
Covered NWSB @ 17.78
Hello
I am using pairtradefinder for three weeks now and I am successful so far. (from 28 trades I closed 17 for a profit and 1 for a small loose). I am basically following the same what Jonny is doing, but I am taking more trades every day.
I have one question to Jonny or anyone using PTF:
How do you interpret the PercentFromMean chart? I can’t understand how this is calculated? Is this the difference between the green and blue line on the ration chart? I got to know that the PercentFromMean is the % difference between the current ratio and the average ratio. Still I don’t know the formula for this calculation? I would appreciate if someone could give a simple example of the calculation?
Thank you!!
Imagine:
ratio=1.1
Average ratio for last 14 days= 1
Percent from the mean is 10% .
PercentFromTheMean it's a indication of your possible profit. But do not forget ratio and average ratio, is changing every day.
If you trade pairs where the percentfromthemean is to low (<3%), you will be working just for the comissions
Quote from tatankas:
Total, how are you doing?
Can you share your statistics?
I usually avoid these situations, are you doing good, trading pairs, where one of the stocks presented results?
SCHW/AMTD in play. Double Signal.
3 new trades;
Short FDX:HUBG @ 2.7895
Short TRV:RNR @ 0.9168
Short NUVA:PSYS for a scalp (overbought intraday). I look at it righ now and if I could get out flat I would, lol.
New trade
Long CLR @ 26.32
Short ESV @ 34.86
jonny, now that I've bought PTF I would have thought I'd be running the latest version of it and on the face of it my number, v2.5..., is bigger than yours, v2.2g but at the top you have a 'Trigger' icon which I dont have.
Can you let me know what this part of the app is ? I am aware that you run Beta tests, so it would be nice to know if this is part of an element we can all expect in the near future.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from jonnysharp:
As per several requests Id thought Id do a performance update.
Start of journal: 18th August, 2008
Cut off date: 22nd April, 2009
Return: 93.73%
Annualized: 139.89%
Biggest Drawdown: 8.9%
SP500 Return: -33.4%
Outperformance: 127.13%
Using a generous risk free rate of return of 3% my sharpe ratio is 15.38 ((139.89-3)/8.9) long term stock market average is 0.40, hedge funds consider above 2.00 to be good and above 4.00 to be exceptional, so Im very happy with my risk-adjusted returns and my absolute return aswell.
Below is my a/c equity curve since starting, you can see a soft patch at the start when the market was very dislocated last year and when I didn't have my current trade filters, since then Ive improved my performance and conservatively increased my trade size.
Also attached is a pdf doc showing all my trades Ive taken exactly as Ive entered them in this journal in real time, no hindsight trades.
I really owe a big thank you to the team at pairtrade finder for sharing an incredible piece of software that actually has worked for me, it has definitely changed my life for the better.
Jonny.
Quote from jonnysharp:
Exited trade for small profit
Sold AXS @ 24.63
Covered PRE @ 67.08
SBRY.L/TSCO.L in play
I have few questions to Jonny or anyone else working with PTF for a longer time:
1. I observed that you incorporated the percentfrommean chart into your trading. How important is this chart in your trading stile, how do you interpret the chart, any rules?
2. Seems like volatility is not that important factor in your trading style since sometimes the chart is going up or down. Or do you invest less capital in pairs with high volatility?
3. By using back tester, do you have it set to 360 days? How do evaluate the chart in the back tester since it will appear differently in the watch list due to a different (shorter) time frame?
4. In this journal you mentioned that you may incorporate stops into your trading plan in the future. Are you using stops now, and if yes what kind of stops?
The stop seems to make sense to me. Currently I have a very ugly trade. On May 13, I bought BLKB and shorted PTI. I am 10% down on this position now and this takes about 25% of my profit. (I had 17 profitable trades, but none of the profit was as high as 10% and usually I only make small profit). And although my position sizing is small, still the one trade cuts my profit significantly. I didn’t sell it yet, as I am waiting for the exit signal, but it makes me nervous What to do?
Thanks for any help on this.
Dr who, yes Im running a beta version at the moment, been providing feedback for them, you could prob get a copy too, just email them.
Kevin, yes I may have missed listing the entry on that pair, don't have the time to go through all the posts, however to verify in ptf the signal was generated on the 30th of April, I entered AXS @ 24.63 and short PRE @ 68.19, small profit on the trade.
Treve, I like to see the % from the mean near record highs or lows as advised by ptf, no I don't look at volatility anymore, I don't understand your pt 3, not using stops, happy with the way it is now, you could use a time based stop, however if your trading conservatively any one position going against you shouldn't risk blowing up your a/c, keep position sizing small relative to a/c.
Quote from Treve1: Currently I have a very ugly trade. On May 13, I bought BLKB and shorted PTI. I am 10% down on this position now and this takes about 25% of my profit. (I had 17 profitable trades, but none of the profit was as high as 10% and usually I only make small profit). And although my position sizing is small, still the one trade cuts my profit significantly.
Exited trade yesterday
Sold CMP @ 52.19
Covered SYT @ 46.81
Quote from jonnysharp:
Exited trade yesterday
Sold CMP @ 52.19
Covered SYT @ 46.81
Quote from neospecialist:
This trade highlights some of my concerns.
According to my records, this trade was open for close to a month and a half, and besides the loss incurred would have tied up capital for a relatively long period. Any second thoughts about using a time stop? Do you have many examples of 30 day plus
profitable trades?
out FDX:HUBG @ 2.83 from 2.79 (loss),
out TRV:RNR @ 0.89 from 0.9168 (tiny gain),
Fundamentals Optional?
Quote from jonnysharp:
New trade
Long CLR @ 26.32
Short ESV @ 34.86
Closed 2 trades
Sold MET @ 31.12
Covered PRU @ 39.46
Sold PNW @ 27.25
Covered EDE @ 15.58
New trade
Long ISBC @ 8.32
Short HBCK @ 12.50
Quote from neospecialist:
This trade highlights some of my concerns.
According to my records, this trade was open for close to a month and a half, and besides the loss incurred would have tied up capital for a relatively long period. Any second thoughts about using a time stop? Do you have many examples of 30 day plus
profitable trades?
Bentedges, yes Im trading at the posted prices, I have IQfeed in PTF, so Im using real time data, I look for signals 30mins before close, I then execute right before the close or place MOC orders, then take the screenshot after market close, hence the closing prices shown.
I am following the signals strictly, I don't look at fundamentals because Im only playing the technicals, I don't fundamentals come into play too much in short term trading.
AZO/ORLY & QCOM/BRCM in play.
Quote from jonnysharp:
Bentedges, yes Im trading at the posted prices, I have IQfeed in PTF, so Im using real time data, I look for signals 30mins before close, I then execute right before the close or place MOC orders, then take the screenshot after market close, hence the closing prices shown.
I am following the signals strictly, I don't look at fundamentals because Im only playing the technicals, I don't fundamentals come into play too much in short term trading.
I get MOC orders on NASDAQ stocks through IB no problems. Most of the the time the execution price is the closing price.
Quote from neospecialist:
I don't mean to quibble but, how does one get executions at market closing prices in Nasdaq stocks? I know that you can put in MOC orders in NYSE and the specialists accept those orders 20 minutes before the close but I was unaware of any similar program on NASDAQ stocks.
Quote from cipherscribe:
I get MOC orders on NASDAQ stocks through IB no problems. Most of the the time the execution price is the closing price.
Neo,
Quote from neospecialist:
Most of the time? Is somebody actually handling the order manually? I am not trying to beat this to death, but is this an IB application that is exclusive to them, or can anyone achieve this trading through other firms?
Is correlation a valid filter criteria?
Correlation has not been a valid filter criteria in my trades.
I've been pair trading with real money since March 5 using PTF. I've completed 66 trades averaging 3% ROI per week, except for the last week which has been a bummer.
The average correlation of the pairs in my 44 profitable trades has been 57%. And for my 22 losing trades has also been 57%. I do not consider correlation in my choices, either when setting up my pairs, or when entering the trades. Five of my profitable trades had negative correlations at the time I placed the trade (for returns of 18%, 8%, 6%, 6%, 3%) . All of my losing trades had positive correlations. Correlation does not seem to be a factor in profitability.
My initial pair choices are made using profit history. I look for pairs that have a history of over 90% profitable trades in the last year. Correlation is irrelevant, as I see it. I do choose pairs that are in the same industry.
Cointegration seems to be more significant. Problem is, it is far easier to find pairs that are correlated, than cointegrated. But correlation does not seem to be a factor in the 66 pair trades I've made since March 5.
I know this is radically different from the basic premise of pair trading. But after 66 pair trades, I think my statistics have some validity.
Or perhaps there is something unique about the limited period I've been trading?
Any thoughts?
Walt B
Re: Is correlation a valid filter criteria?
Some good information to think about. I guess it really comes down to whatever works for the individual. Certainly cointegration seems to be the valid method from a mathematical perspective, but correlation seems to be a reasonable facsimile, going by the results of Jonny's trades.
Quote from waltbx:
Cointegration seems to be more significant.
Any thoughts?
Walt B
New trade
Long RY:TD @ 0.7931
Re: Is correlation a valid filter criteria?
Quote from waltbx:
Correlation has not been a valid filter criteria in my trades.
I've been pair trading with real money since March 5 using PTF. I've completed 66 trades averaging 3% ROI per week, except for the last week which has been a bummer.
The average correlation of the pairs in my 44 profitable trades has been 57%. And for my 22 losing trades has also been 57%. I do not consider correlation in my choices, either when setting up my pairs, or when entering the trades. Five of my profitable trades had negative correlations at the time I placed the trade (for returns of 18%, 8%, 6%, 6%, 3%) . All of my losing trades had positive correlations. Correlation does not seem to be a factor in profitability.
My initial pair choices are made using profit history. I look for pairs that have a history of over 90% profitable trades in the last year. Correlation is irrelevant, as I see it. I do choose pairs that are in the same industry.
Cointegration seems to be more significant. Problem is, it is far easier to find pairs that are correlated, than cointegrated. But correlation does not seem to be a factor in the 66 pair trades I've made since March 5.
I know this is radically different from the basic premise of pair trading. But after 66 pair trades, I think my statistics have some validity.
Or perhaps there is something unique about the limited period I've been trading?
Any thoughts?
Walt B
Re: Re: Is correlation a valid filter criteria?
Quote from cipherscribe:
What methods do you use to identify cointegrated pairs?
Well i've just spent the last 3 days reading this thread from post one
nuggets of gold EVERYWHERE. Thanks Johnny and the rest for everything
I have a question for Johnny,
How much emphasis can I put on winning %? Often i'll find stocks that correlate 40-50-60% however have a win ratio of 97-100% on over 12 trades! with win/loss ratio of 2+
Obviously the more supporting indicators the bigger the edge but how legit is this winning % coupled with win/loss ratio?
If I were to build a universe with say 500 pairs with winning % of 95% and win/loss 2+....would I be correct in allowing for pairs with lower correlation?
Waltbx, whilst I tend to agree with you regarding your feelings towards correlation (and in fact Rob Friesen agrees with you in his manual), I really don't think you should be getting too excited about such a small sample. 66 trades is hardly a lot and its easy to be fooled by data from this few. Wait till you have a few thousand results.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Jonny, reading your journal with great interest! i'm totally new to spreads
question: when you find a good opportunity, for example, a 2 standard deviation reversion from the mean, and it's a good,
non-trending spread.
how does this play out vs institutional players? . . . i mean does an opportunity disappear quickly because there are a lot of arbitrageur hunters out there?
how quick to you have to be in taking a trade, once you've found an obvious opportunity??
i hope the answer is: relax, everyone can profit
thanks!
Varima
Quote from Dr Who:
Waltbx, whilst I tend to agree with you regarding your feelings towards correlation (and in fact Rob Friesen agrees with you in his manual), I really don't think you should be getting too excited about such a small sample. 66 trades is hardly a lot and its easy to be fooled by data from this few. Wait till you have a few thousand results.
I found an excel spreadsheet that seems to look for cointegration.
I did not test it as I have no plan on using it.
I also found a Matlab code that I will try to use. Again, I did not test the m file yet.
And I am ont sure the Johansen procedure is the right one for pairs trading!
For those interested:
http://www.spatial-econometrics.com/coint/johansen.m
Quote from cooper1308:
Well i've just spent the last 3 days reading this thread from post one
nuggets of gold EVERYWHERE. Thanks Johnny and the rest for everything
I have a question for Johnny,
How much emphasis can I put on winning %? Often i'll find stocks that correlate 40-50-60% however have a win ratio of 97-100% on over 12 trades! with win/loss ratio of 2+
Obviously the more supporting indicators the bigger the edge but how legit is this winning % coupled with win/loss ratio?
If I were to build a universe with say 500 pairs with winning % of 95% and win/loss 2+....would I be correct in allowing for pairs with lower correlation?
Quote from Appleseed:
I may be entiely wrong in this asumption but i'll go ahead.
I have a feeling that the winning % is just curve fitting. You can
find hundreds of pairs that are in the winning 80 to 90 percentile
today and going foreward will not maitain that level of a winning percentage of the past. If you select a group of winning pairs today and go forward 6 months with the same consistancy of 80 -90% winners you may have good candidates for pair trading.
Any thoughts??
cheers
john
Good points, keen to see peoples
Also, once I build my universe of pairs, the database remains quite static. There may be many great quality pairs that showed low correlation / loss win $ ect ect during my backtest and I have missed. While others that showed great stats during my backtest infact have broken down in correlation or mean reversion.
What would work perfectly is if PTF had some sort of system that continually backtested categories and pairs.......then automatically uploaded ceratain pairs into the console (or set off some sort of alert) as they came began posting strong stats.... Existing weaker pairs would drop off in order to make room......Sort of like an PTF S&P500 or something
Quote from cipherscribe:
John,
I should probably think more about your post before answering, but your post raises questions that I had been pondering also.
For example, just because I filter my universe of pairs based on correlation and %/$ profit, does that mean I am cherry picking the best pairs going forward, or just the coincidental, chance favorites over the last 6 months. I agree with you that perhaps these may not be in the top of the list in the next six months, based on the same filtering technique.
Perhaps I might be better taking those correlated pairs (I sort of believe in correlation as a method of identifying equities that have historically followed the same path) that have a poor profit history - the ones below the mean $ return, thinking that these pairs may (using the same strategy as pairs trading itself) show better returns as their $$ returns move back to the mean.
I'm not sure if I agree with the above statement, however cherry picking the historically best winners might be flawed.
But then again, the Turtle traders made millions trend trading. Picking the winners is following a trend, one that may not yet be fully exploited, and thus still have a good edge.
Which is right? Neither until proven correct, and the only way is to test and see. Jonny picks those that show a $ profit above $300 (unless he has since changed his filters), and has shown the trend style works. Perhaps picking the low $ winners historically works better? I might try sim trading this method to see if there is an edge here.
I'm probably too verbose for a saturday afternoon. Sorry... :-)
Have a good weekend all.
Adrian
Also Johnny,
As your account is up over 100%, have you began increasing your size? If not are there specific reasons?
Re: Re: Is correlation a valid filter criteria?
Quote from cipherscribe:
Some good information to think about. I guess it really comes down to whatever works for the individual. Certainly cointegration seems to be the valid method from a mathematical perspective, but correlation seems to be a reasonable facsimile, going by the results of Jonny's trades.
Quote from total_keops:
And I am ont sure the Johansen procedure is the right one for pairs trading!
pairs rookie question
hi guys, i'm trying to learn more about pairs
can anyone comment on this rookie idea pls:
i'm using marketrac.nyse.com/mt/index.html , a visualization tool from nyse, to get a feel for what's going on in the market. it shows DJIA components
it's 20 min behind actual market prices
if i see a stock that's way out of balance, can i take it as a signal, at least an initial signal, to trade it against the dow jones?
(i mean it may look like it's out of balance, but it may actually be reverting to some mean ratio value, so that wouldn't be tradable, i understand that)
can i trade the stock that's out of balance with DJIA against, say, DIA, the dow etf. e.g. XOM against DIA? (i'm trading etfs/stocks only)
if this sounds silly, please let me know. thanks!
Varima
I just downloaded the trial version of PTF. I've only looked at the software briefly and had some questions.
What is the basic method they are using to flag new pairs, and to close out positions? Is it basically a z-score on the ratio of the pairs?
Another question is can you do a long term backtest on the pairs? I like to view the cumulative open equity going back many years but the backtests I saw only went back a year or so(?)
Another question I had was about indexes.
I added some stock indexes from around the world and saw some decent pairs.
But I'm wondering what price is the platform using to enter trades? If same date close price then that's an issue.
For example if I'm trading HangSeng/DJI pair, HangSeng is already closed but the simulator gets me in anyway.
Quote from Angelo_60:
Just out of curiosity, where did you find this spreadsheet?
Quote from cooper1308:
I have a question for Johnny,
How much emphasis can I put on winning %? Often i'll find stocks that correlate 40-50-60% however have a win ratio of 97-100% on over 12 trades! with win/loss ratio of 2+
Obviously the more supporting indicators the bigger the edge but how legit is this winning % coupled with win/loss ratio?
If I were to build a universe with say 500 pairs with winning % of 95% and win/loss 2+....would I be correct in allowing for pairs with lower correlation?
Quote from Ms Varima-Garch:
question: when you find a good opportunity, for example, a 2 standard deviation reversion from the mean, and it's a good,
non-trending spread.
how does this play out vs institutional players? . . . i mean does an opportunity disappear quickly because there are a lot of arbitrageur hunters out there?
how quick to you have to be in taking a trade, once you've found an obvious opportunity??
Quote from cooper1308:
Also Johnny,
As your account is up over 100%, have you began increasing your size? If not are there specific reasons?
Quote from jonnysharp:
When you hear the term ''opportunity quickly disappear'' that is referring to high-frequency arbitrage, trades based on a small timeframe, seconds/minutes, thats what the big players are doing, same logic as us but on a grander scale, lower timeframe/thousands of trades per day, thus those opportunities come and go very quickly. We are trading intra-week, the opportunities are longer lasting and we aren't competing against the big players, its a market of our own allowing us to profit.
Quote from jonnysharp:
When you hear the term ''opportunity quickly disappear'' that is referring to high-frequency arbitrage, trades based on a small timeframe, seconds/minutes, thats what the big players are doing, same logic as us but on a grander scale, lower timeframe/thousands of trades per day, thus those opportunities come and go very quickly. We are trading intra-week, the opportunities are longer lasting and we aren't competing against the big players, its a market of our own allowing us to profit.
Quote from tatankas:
"It's a market of our own allowing us to profit" .
Sorry, this sounds great, but I can't understand it.
Why the big players would ignore the opportunities you are taking? What's so special in this strategy, that hedge funds are not able to exploit it?
A few pair ideas
A few ideas that turned up in my screens this weekend:
In the small cap arena, a Long in KNDL, Short in PRXL. Currently KNDL is trading at $10.92 and PRXL at $10.88. The pair is more than 2 standard deviations from the mean, and the valuation and fundamentals also support the pair.
In the large caps, a long in INTC and short in TXN is warranted. Just under 2 standard deviations, and again, the fundamentals support the trade. INTC currently trading at $16.23, TXN at $20.23.
Lastly, a long in RDC against a short in NFX. RDC at $21.87 and NFX at $38.08.
Just throwing a few ideas out there for anyone who may care to take a look. Full disclosure: I put all these trades on. Disclaimer: Past performance is no guarantee of future performance. You can expect to lose money, blah blah blah. LOL
Quote from tatankas:
"It's a market of our own allowing us to profit" .
Sorry, this sounds great, but I can't understand it.
Why the big players would ignore the opportunities you are taking? What's so special in this strategy, that hedge funds are not able to exploit it?
Quote from tatankas:
"It's a market of our own allowing us to profit" .
Sorry, this sounds great, but I can't understand it.
Why the big players would ignore the opportunities you are taking? What's so special in this strategy, that hedge funds are not able to exploit it?
Is there a possibly that they have a higher minimums on market cap also?
i.e They wouldnt touch pairs with stocks less than 5b, due to liquidity? The size they trade would probably drive smaller cap pairs back to the mean straight away
Whereby retail punters have the opportunity to take smaller 10-100k positions without having much impact on the ratio
Quote from jonnysharp:
Im not saying the big players would ignore these opportunities, most of them are focusing on high-frequency, some of them may be trading intra-week aswell, however we are on a more level playing field when it comes to intra-week trading as we don't stand a chance competing against them in the high-frequency game.
Quote from cooper1308:
Is there a possibly that they have a higher minimums on market cap also?
i.e They wouldnt touch pairs with stocks less than 5b, due to liquidity? The size they trade would probably drive smaller cap pairs back to the mean straight away
Whereby retail punters have the opportunity to take smaller 10-100k positions without having much impact on the ratio
The advantage of this trade is largely because some hedge funds follow this strategy, and so they help to close the 'pricing anamoly' for you.
AKZO/BASF is in play in Europe.
Is anyone else interested in trading European pairs?
Trade entered yesterday
Long OSIP @ 30.24
Short CELG @ 42.57
Quote from jonnysharp:
New trade
Long CLR @ 26.32
Short ESV @ 34.86
What might have happened is that an exit signal was triggered intra-day yesterday, however towards the close when I trade it was still below its mean if that makes sense.
Quote from tradingtrading:
Is anyone else interested in trading European pairs? [/B]
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Re: Re: Re: Is correlation a valid filter criteria?
Quote from Angelo_60:
I disagree.
Johnny's results just prove he's able - with a ton of good subjective judgement - to extract some good trades from a ton of potential candidates popped up by a
data mining software.
They don't prove correlation is a good proxy of cointegration...
Quote from total_keops:
You may have the same problem as me, I dont ride my winners as much as I should.
MCD/YUM or MCD/BKC. MCD long, sell by close tomorrow. MCD has dividend 06/04.
Quote from Dr Who:
I do just UK shares as I'm based in the UK
OUT RY:TD @ 0.78 from 0.79 (loss).
Quote from Treve1:
For me the system is working this way:
In May I made 34 trades. I closed 20 trades for a profit and only three for a loss. One would think this is a great achievement, but it is not since I am still keeping 11 pairs and most of them are awful. The worst pair is PTI � short and BLKB- long. Alone PTI I am currently 47% in minus, this is by far too much. Good thing I am taking only small positions, but still this doesn't save me.
I am sure that most of the 11 pairs I will sell for a loss and should I sell them now I would wipe out all of the profit I already made with the 20 profitable trades. Actually I would be in a big minus assuming I sold all the 34 trades as for today. But I am waiting for exit signals......
Successful Trading means: Cut Your Losses and Let Your Profits Run, but the strategy is doing the exact opposite. I have the impression that I am cutting the winner and I let the losses run. I am happy with the exit signals, but sometimes I could sell half of the position, protect myself with the stop loss and try to make more money.
More important however, is cutting the loosing trades. It does make sense to be long the smaller stock since the majority of my losing trades are the trades I went short.
Secondly, it will be necessary to observe the news for all the pairs. This would take some time but it would pay off. Does anyone know what news would be the most important to check? What are the best websites to check for news quickly and efficiently? Any other suggestions? Does anyone experience similar problems?
Last week seem not to be good for mean reversion.
Quote from tradingtrading:
Dr Who, thank you for your response. I confess that I am impressed by your results and that you are inding significant numbers of UK trades to monitor. What kind of stocks are you looking at?
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
When you guys do some backtesting like that, do you take care of taking out the period from september to november 2008 because it was an abnormaly inneficient period for pairs or you just assume that this is representative of the expectations you can have about the future? This period had many good opportunities because a lot of unloading was happening I think and this is not very representative of normal market conditions.
New one:
Short IWO/IJH @ 0.9649
Passing LMT/COL but I will follow it.
I feel it's critical to research of fundmentals. You need to put in the effort.....
Often you get a massive divergence from a historical correlating pair.. It looks like the perfect setup through PTF and "ENTER" will be flashing all over the place.
All it takes is a little effort to realise there is a massive change in the underlying fundamentals and you'll soon realise some "great trades" are actually suicidal
Sometimes it's the trades you don't take not the ones you do, that prove the difference
Quote from cipherscribe:
Treve,
Keep your head up. Yea, last week was pretty awful for me also. I have one pair that has eaten into my profits, to the extent of around 20% of the position size (CEPH/VRX).
However I don't yet have enough trades to make any significant statements, and I'm not going to start 'tweaking' with things like 'only buy the small market cap' and other fundamentals. If it turns out after 100 trades that I suck at picking pairs, or that the last 20 were just as sucky as the first 80 (meaning I'm not learning how to dentify a good ratio chart or other stuff), then I'll jump out and re-evaluate.
Not sure if this helps, other than everyone goes through slumps. I think Jonny talked about a drawdown of 8-10% of his portfolio of open and closed equity in the process of his journal, so unless you have stepped beyond that boundary, your still well within his trading range.
Adrian
Quote from bentedges:
Hedge funds CAN and DO use this strategy, typically with a longer time frame than seconds,minutes,hours,or days.
The reasons are many for why stocks diverge, but it is my opinion the major reason is because the vast majority of money is ran by mutual funds, who are long-only. Their buying and selling creates opportunities versus a much smaller lot of folks that play in the stat arb space.
I think what johhnysharp may have been speaking of are funds like Renaissance Capital, the large hedge fund founded and ran by James Simons. They are known to run their lightening-quick algorithms to capture pennies in hundreds of stocks throughout the day.
Quote from Ms Varima-Garch:
Indeed, time is often a friend of the mean-reversion trader: the longer s/he waits, perhaps the more profitable the trading opportunity. And if s/he enters too early and suffers a loss, s/he can always double the position. As I explained in a previous article, stop-loss should generally not be applied to mean-reverting trades on a short time-scale. [emphasis added - VG]
Quote from tradingtrading:
I believe the pairs trading he refers to in his articles are with commodity ETFs. In these pairs the underlying fundamentals haven't changed, because the pricing of the commodities within the ETFs is the same. Therefore the price relationship is not a reflection of an underlying fundamental change.
Within the stock pairs that tend to be traded on here, it is by no means clear that there hasn't been a change in fundamentals. Therefore doubling up on a losing trade could lead to ruin a lot quicker than you think. Particularly, if the pricing anamoly is due to insider trading or other participants trading on non-publicly available information. The last point is little discussed, but I believe it is a real danger to the pairs trader.
Re: Re: Re: Re: Is correlation a valid filter criteria?
Quote from cipherscribe:
Hi Angelo.
Cointegration is when prices move together over a period of time, at approximately the same rate, thus avoiding exploding spreads, and profitable circumstances for cointegration pairs traders.
Is that right?
Adrian
PFE/WYE, 300X100. WYE long, dividend due on 06/08. Sell on 06/05.
KO/PEP, 100X100. KO long, dividend due on 06/11. Sell on 06/10.
Both pairs are $ neutral.
Quote from dealmaker:
PFE/WYE, 300X100. WYE long, dividend due on 06/08. Sell on 06/05.
KO/PEP, 100X100. KO long, dividend due on 06/11. Sell on 06/10.
Both pairs are $ neutral.
PEP had dividend on 06/02 we collected the profit from the surge leading to the dividend and closed the position. KO has dividend on 06/11 so now created a new position KO long, PEP short.
Note, I am not looking to collect the dividend necessarily but, mostly to benefit from the surge leading to the dividend.
No trade is suicidal unless your position size is too big.
Quote from cooper1308:
All it takes is a little effort to realise there is a massive change in the underlying fundamentals and you'll soon realise some "great trades" are actually suicidal
Re: Re: Re: Re: Re: Is correlation a valid filter criteria?
Quote from Angelo_60:
Not using financial series, my best example of a cointegrated couple: think about two lovers who often argue about where to spend the week-end: A would like to go the beach, C would like to go to the mountains.
Most of the time they depart together on Saturdays for the same destination after reaching a temporary agreement; sometimes they are not in agreement and spend the week end split.
But, as there is true love (=they are cointegrated) they all come back to the same home on Sunday evenings.
Quote from Treve1:
For me the system is working this way:
In May I made 34 trades. I closed 20 trades for a profit and only three for a loss. One would think this is a great achievement, but it is not since I am still keeping 11 pairs and most of them are awful. The worst pair is PTI – short and BLKB- long. Alone PTI I am currently 47% in minus, this is by far too much. Good thing I am taking only small positions, but still this doesn't save me.
I am sure that most of the 11 pairs I will sell for a loss and should I sell them now I would wipe out all of the profit I already made with the 20 profitable trades. Actually I would be in a big minus assuming I sold all the 34 trades as for today. But I am waiting for exit signals......
Successful Trading means: Cut Your Losses and Let Your Profits Run, but the strategy is doing the exact opposite. I have the impression that I am cutting the winner and I let the losses run. I am happy with the exit signals, but sometimes I could sell half of the position, protect myself with the stop loss and try to make more money.
More important however, is cutting the loosing trades. It does make sense to be long the smaller stock since the majority of my losing trades are the trades I went short.
Secondly, it will be necessary to observe the news for all the pairs. This would take some time but it would pay off. Does anyone know what news would be the most important to check? What are the best websites to check for news quickly and efficiently? Any other suggestions? Does anyone experience similar problems?
Last week seem not to be good for mean reversion.
Exited one trade for profits
Sold ISBC @ 8.89
Covered HCBK @ 12.63
Re: A few pair ideas
Quote from bentedges:
A few ideas that turned up in my screens this weekend:
In the small cap arena, a Long in KNDL, Short in PRXL. Currently KNDL is trading at $10.92 and PRXL at $10.88. The pair is more than 2 standard deviations from the mean, and the valuation and fundamentals also support the pair.
In the large caps, a long in INTC and short in TXN is warranted. Just under 2 standard deviations, and again, the fundamentals support the trade. INTC currently trading at $16.23, TXN at $20.23.
Lastly, a long in RDC against a short in NFX. RDC at $21.87 and NFX at $38.08.
Just throwing a few ideas out there for anyone who may care to take a look. Full disclosure: I put all these trades on. Disclaimer: Past performance is no guarantee of future performance. You can expect to lose money, blah blah blah. LOL
Quote from cipherscribe:
No trade is suicidal unless your position size is too big...
Quote from total_keops:
Look at any pair that was with VOW.DE (Volkswagen, see in Yahoo) in november 2005.
Exited one trade for profits
Sold CLR @ 32.17
Covered ESV @ 40.04
New trade
Long SPG @ 54.51
Short TCO @ 27.95
Quote from jonnysharp:
Exited one trade for profits
Sold CLR @ 32.17
Covered ESV @ 40.04
New trade
Long SPG @ 54.51
Short TCO @ 27.95
Quote from tatankas:
According to yahoo finance TCO closed @27.94 and SPG @54.59 .
Are you not trading in the end of the day, or these were the prices you got with IB MOC orders?
Does anyone trade stocks versus preferreds, especially in financials and willing to share some of the pairs they trade?
it would be greatly appreciated.
hi guys. i'm rookie. i may have asked this before, but i'd be interested to know if anyone has a view on this
i think visualizations may be a handy tool in pairs trading, in addition to various statistical. specifically:
marketrac.nyse.com/mt/index.html
finviz.com (the market map)
it is the rule of thumb
both are lagging, but probably ok for a swing trade
based on the finviz global etf vizualization alone - i don't have access to statistical tools yet (but i am play with the gummy now) - i have just placed the following paper trade:
BHP -167@ $60.02 (australian stock)
EWA +593@ $16.80 (australia etf)
1:1, total position $20K
this is an experiment, and if it goes well, i'll let you know.
any thoughts on this visualization stuff? i think it may have some added value, in addition to various statistical, because you make look at stock and how it is go against the peer
so you can visually eyeball if a stock is out of proportion vis-a-vis its peer group. for example, in the case of nyse markettrack, trade an out-of-balance component stock against DIA, the dow etf
thanks for any input!
How much attention do you guys give the spread chart? (eg. ABC - XYZ)
I was under the impression a trending spread chart is a bad sign?
However if we have stoc ABC @ $100, Stock XYZ @ $10 and they both gain 20% over 3 months.......the spread blows out from $90 to $109 and would most likely show as a trending spread chart
This surely couldn't be reason to disqualify a trade....theoretically they could be trading at a correlation of 100%?
the spread ratio obviously seems much more logical to use here rather than the spread difference. this would avoid the problem you just pointed out.
Quote from cooper1308:
How much attention do you guys give the spread chart? (eg. ABC - XYZ)
I was under the impression a trending spread chart is a bad sign?
However if we have stoc ABC @ $100, Stock XYZ @ $10 and they both gain 20% over 3 months.......the spread blows out from $90 to $109 and would most likely show as a trending spread chart
This surely couldn't be reason to disqualify a trade....theoretically they could be trading at a correlation of 100%?
Yeah the ratio chart has to be one of the most important for sure. But that wasn't my question.
What can you gain out of the actual spread chart? and how much weighting do you give it? The only reason I ask is it's one of the default charts when you initially download so it must have some bearing.
If both stocks trade at very similar price levels then the spread-chart would be a good visual of the actual divergence....but other than that, I don't know what to get out of it..... that's what i'm trying to find out
Quote from BillySimas:
the spread ratio obviously seems much more logical to use here rather than the spread difference. this would avoid the problem you just pointed out.
Quote from cooper1308:
Yeah the ratio chart has to be one of the most important for sure. But that wasn't my question.
What can you gain out of the actual spread chart? and how much weighting do you give it? The only reason I ask is it's one of the default charts when you initially download so it must have some bearing.
If both stocks trade at very similar price levels then the spread-chart would be a good visual of the actual divergence....but other than that, I don't know what to get out of it..... that's what i'm trying to find out
I am not talking about the ratio chart...I am talking about the spread chart.
ie..... ABC minus XYZ
not ABC divided by XYZ
Quote from Ms Varima-Garch:
i'm rookie, but i think you need the ratio chart for the following:
to see if there is a mean-reverting pattern in the ratio itself. if there is, if it tends to pull back from extreme values - like a stock trading in a channel (where you can then use atr/kettler or bollinger bands)
you can then take a trade when the ratio has gone far out from its normal zone. then you may have some statistical edge. i think that's the point. but again, as i said, i'm rookie.
Quote from cooper1308:
I am not talking about the ratio chart...I am talking about the spread chart.
ie..... ABC minus XYZ
not ABC divided by XYZ
Quote from cooper1308:
I am not talking about the ratio chart...I am talking about the spread chart.
ie..... ABC minus XYZ
not ABC divided by XYZ
Yeah exactly what I was thinking...
Just wonder why it is even there, unless I have completely missed something
Quote from Podimer:
i can't imagine what else you would get out of it if the prices are NOT similar. i mean, if the spread is huge, there could be times where the spread chart is showing a convergence when the actual ratio is going out further from the mean. thus, potential confusion.
1. quick update on the finviz (visualization) - based paper trade i mentioned earlier. looks like showing a small profit, but will keep it open to see what happens further.
not going to hijack jonnysharp's excellent journal with untested etf ideas, so i'm hereby disappearing from the thread good luck, traders!
"based on the finviz global etf vizualization alone - i don't have access to statistical tools yet (but i am play with the gummy now) - i have just placed the following paper trade:
BHP -167@ $60.02 (australian stock)
EWA +593@ $16.80 (australia etf)
1:1, total position $20K"
2. a couple of other ideas w etfs i'm make look at now, for paper trading:
XLE short
USO long
XLE short
EWC long (Canada etf)
GDX short (gold producers)
EWC long (Canada etf)
GDX short
DIA long (dow johns)
GLD short
EWC long (Canada etf)
I am rid of my most horrid trade - CEPH/VRX.
It came back from a really terrible level to only a 16.47% loss on invested equity.
I'm still +ve with only 35 trades under my belt, so I'm happy thus far.
Hope everyone else is doing well.
Adrian
Quote from cipherscribe:
I am rid of my most horrid trade - CEPH/VRX.
It came back from a really terrible level to only a 16.47% loss on invested equity.
I'm still +ve with only 35 trades under my belt, so I'm happy thus far.
Hope everyone else is doing well.
Adrian
Quote from jonnysharp:
Exited one trade for profits
Sold CLR @ 32.17
Covered ESV @ 40.04
New trade
Long SPG @ 54.51
Short TCO @ 27.95
I don't expect to make any particular amount on any trade, I just wait for an exit signal which is given when the pair returns to the mean.
Quote from cipherscribe:
I am rid of my most horrid trade - CEPH/VRX.
It came back from a really terrible level to only a 16.47% loss on invested equity.
I'm still +ve with only 35 trades under my belt, so I'm happy thus far.
Hope everyone else is doing well.
Adrian
Quote from sysre:
too bad you didn't do CEPH/VRTX
that's a sweet pair
Agreed the correlations are low for the pair CEPH/VRTX and CEPH/VRX.
But I did a very rough 10 year backtest using a rolling 2 year z-score (with 2stdev trigger) and CEPH/VRTX actually looked somewhat reasonable with information ratio of around 1.0. It was a crude test without considering T-cost.
The pairing with VRX didn't look as good.
Now, I know high correlation implies that the reversion tendency is good, but I cannot explain why a low correlated pair can sometimes work for a reversion strategy.
A question to ponder: if high correlation is a requirement for a good pair, then why is it difficult to pair trade spy/dia (correlated 94%)
Quote from yobo:
Why you guys are trading them as a pair is beyond me.
Quote from sysre:
A question to ponder: if high correlation is a requirement for a good pair, then why is it difficult to pair trade spy/dia (correlated 94%)
I know the cointegration issue has come up before and I'd love to be able to measure it easily.
Does anybody know a dumbed down formula for it?
I'd love to have an excel function
=cointegration(rangeA, rangeB)
Nice long Pairs thread - and no time to go through everything. I would like to contribute though. How are you guys measuring and creating trade triggers for your relationships?
What are your thoughts about normalising the stock prices using a z-score method?
Then creating a composie z-score oscillator to measure the divergence convergence of the normalisations?
I have some custom Ninja code to handle the statistical relationships and for backtesting. Trade decisions are then a composite of statistical, technical, sentiment and fundamental triggers.
Attached is a sample of the Ninja idea.
New one;
Long XOP:IEO @ 0.7726
Managed to get a good entry even though the spreads are a little wacky.
The key to sustainable pairs trading is to know when to cut loss
before the correlation/co-integration black swan suddenly appears....
what cut-loss rules does pairstrader software based on?
Any suggestions using some quantitative guidelines?
Is there like a Co-integration indicator for 2 instruments?
I don't have a good quantitative guideline for you, but one way to achieve black swan protection is to use options. If you have some options savvy look at buying in-the-money calls and puts to simulate long and short stock positions. This is not economical for every stock, but for hi-volume stocks that have tight B/A option spreads it has merit.
Quote from virtualmoney:
The key to sustainable pairs trading is to know when to cut loss
before the correlation/co-integration black swan suddenly appears....
what cut-loss rules does pairstrader software based on?
Any suggestions using some quantitative guidelines?
Closed trade
Sold DAC @ 3.98
Covered SB @ 7.01
New trade
Long AHL @ 23.28
Short MXGL @ 17.53
Quote from jonnysharp:
New trade
Long AHL @ 23.28
Short MXGL @ 17.53
paper trade, visualization-based. no make look at fundamental or news
detected spike in novartis on the finviz market map 'radar screen'
NVS -239@$42.002 (total position $10K) Novartis, Switzerland
EWL +542@$18.46 (total position $10K) Switzerland ETF
rationale:
4% spike in novartis (daily standard deviation about 1.3%)
high correlation ~87% between novartis and ewl
short major component stock against country etf
Quote from jonnysharp:
Closed trade
Sold DAC @ 3.98
Covered SB @ 7.01
New trade
Long AHL @ 23.28
Short MXGL @ 17.53
closed trade
Sold LNN @ 34.97
Covered BUCY @ 30.04
cooper, the spread chart is important because it shows the normalized $ difference between the 2 stocks in the pair, ideally you want to fade new highs/lows on the spread chart, betting that it will return to normal, fading extreme's has always been a profitable strategy, its just another tool to aide in your conviction for placing a trade, its wise to pair trade 2 stocks that are similar in price, don't pair a $10 stock with a $100 stock, this will reduce the issue you mentioned earlier, this is just my method for doing things, a lot of pair traders do the same, its not a must do rule, just how ive customized my trading, there are other pair traders out there that have their own rules completely different to mine and they are doing well, you've gotta to customize your trading plan to your personality and what makes sense to you, these aren't cherry picked rules, they are all based on a explainable logic.
Quote from jonnysharp:
closed trade
Sold LNN @ 34.97
Covered BUCY @ 30.04
cooper, the spread chart is important because it shows the normalized $ difference between the 2 stocks in the pair, ideally you want to fade new highs/lows on the spread chart, betting that it will return to normal, fading extreme's has always been a profitable strategy, its just another tool to aide in your conviction for placing a trade, its wise to pair trade 2 stocks that are similar in price, don't pair a $10 stock with a $100 stock, this will reduce the issue you mentioned earlier, this is just my method for doing things, a lot of pair traders do the same, its not a must do rule, just how ive customized my trading, there are other pair traders out there that have their own rules completely different to mine and they are doing well, you've gotta to customize your trading plan to your personality and what makes sense to you, these aren't cherry picked rules, they are all based on a explainable logic.
yes I broke my rule on this trade and payed for it, spread chart wasn't nowhere near an extreme. I would be lying if I said it didn't hurt, because it does, but I really step back and look at the big picture, losses are inevitable in this game, you just gotta keep going, I try and treat my trading like a business where my losses are the running costs and my wins is the revenue, so long as your revenue outstrips your costs each quarter, your running a profitable business, its a numbers game, so in a way I welcome losses as part of doing business, im still crushing the averages since starting and Im still convinced my pair trading is the safest place to house my wealth. Been talking with Jared from PTF and he informs me exiting before the pair comes back to the mean with a time based stop is the way to go, he has be doing this manually in his own journal and he is absolutely killing it, with a 85% win rate or something crazy like that, he said in the next update due out soon we will be able to customize the exit with a time based stop, wish I had it earlier, would have saved me a bundle on this trade, anyway thats water under the bridge now, im focused on my trading going forward.
Re: Re: A few pair ideas
Quote from bentedges:
Quick follow-up:
I have taken a portion of these off. Over $2 in the long KNDL, short PRXL. I'm leaving some on, but wouldn't surprise me to see a bit of a pullback in the pair given the run KNDL has had over past few days. KNDL currently at $13.40, PRXL at $11.46.
Assuming one weighted the long INTC, short TXN at a 3:2 ratio, a little bit of profit can be had, but ultimately I expect the pair to converge to -$3.00 or so. INTC currently at $16.13, TXN at $19.89.
A 2:1 ratio in the long RDC, short NFX should have one up nicely. This one works for more me thinks. RDC currently at $22.10, NFX at $35.87.
Again, just my 2 cents.
Quote from jonnysharp:
yes I broke my rule on this trade and payed for it, spread chart wasn't nowhere near an extreme. I would be lying if I said it didn't hurt, because it does, but I really step back and look at the big picture, losses are inevitable in this game, you just gotta keep going, I try and treat my trading like a business where my losses are the running costs and my wins is the revenue, so long as your revenue outstrips your costs each quarter, your running a profitable business, its a numbers game, so in a way I welcome losses as part of doing business, im still crushing the averages since starting and Im still convinced my pair trading is the safest place to house my wealth. Been talking with Jared from PTF and he informs me exiting before the pair comes back to the mean with a time based stop is the way to go, he has be doing this manually in his own journal and he is absolutely killing it, with a 85% win rate or something crazy like that, he said in the next update due out soon we will be able to customize the exit with a time based stop, wish I had it earlier, would have saved me a bundle on this trade, anyway thats water under the bridge now, im focused on my trading going forward.
I think he mentioned exiting within 1stdev of the mean and a 10 day time stop, although he uses a bit of discretionary on a case by case basis, I think this is where experience comes into play and you can use that to your advantage.
Note to everyone; your all welcome to post your trades and ideas in this journal, this isn't just for me, its for us all and Ive learnt a tremendous amount from other people and enjoy reading others trading ideas, so please, keep them coming.
Btw., Jared runs a realtime trading journal with his trades on the PTF forum.
Just exited my best trade to date for massive profits
Sold ZEUS @ 25.52 (bought this one at 16.51 for a 54.57% gain!)
Covered SIM @ 6.92
Very happy today, whats that quote off the yahoo website ''I love the smell of profits in the morning''
Quote from jonnysharp:
Just exited my best trade to date for massive profits
Sold ZEUS @ 25.52 (bought this one at 16.51 for a 54.57% gain!)
Covered SIM @ 6.92
Very happy today, whats that quote off the yahoo website ''I love the smell of profits in the morning''
Just exited my best trade to date for massive profits
Sold ZEUS @ 25.52 (bought this one at 16.51 for a 54.57% gain!)
Covered SIM @ 6.92
Quote from jonnysharp:
Just exited my best trade to date for massive profits
Sold ZEUS @ 25.52 (bought this one at 16.51 for a 54.57% gain!)
Covered SIM @ 6.92
Very happy today, whats that quote off the yahoo website ''I love the smell of profits in the morning''
NUE / X = 300/400, NUE has dividend 06/26.
CPB / KFT = 100/100 KFT has dividend 06/26.
CAT / DE = 100/100 DE has dividend 06/26.
Of-course dividend stocks long.
ORCL/MSFT
JACK/YUM
LRCX/AMAT
I am sorry if this has been asked before, but I can't seem to find a way to search within this thread only.
What are some brokers that are pair-trading friendly? IB?
Thanks,
It's just me, or lately it's almost impossible to find decent pairs?
Quote from tatankas:
It's just me, or lately it's almost impossible to find decent pairs?
Quote from cipherscribe:
BAP/DB ?
Quote from ezbentley:
I am sorry if this has been asked before, but I can't seem to find a way to search within this thread only.
What are some brokers that are pair-trading friendly? IB?
Thanks,
Quote from dealmaker:
NUE / X = 300/400, NUE has dividend 06/26.
CPB / KFT = 100/100 KFT has dividend 06/26.
CAT / DE = 100/100 DE has dividend 06/26.
Of-course dividend stocks long.
Depends on the amount of dividend paid. See earnings.com.
Passed KNX:ODFL, earnings ODFL next week
Passed PCL:RYN, dont like the downgrade on PCL
Passed NDN:BEBE
Seth: "What do you mean, you're gonna pass. Alan, the only people making money passing are N.F.L. Quarterbacks and I don't see a number on your back."
Time you invest
JonnySharp
In the fall of 2008 you reported that you were not pairs trading as a way of making your living, but rather for growth of capital.
If you dont mind my asking, is that still the case or are you trading full time?
If not, how much time would you estimate you invest each day on average for your current rate of performance?
You still have a great thread here, btw.
Many thanks
Quote from tatankas:
Not for me, I am still not trading financials.
Anything change?
Quote from jonnysharp:
Just exited my best trade to date for massive profits
Sold ZEUS @ 25.52 (bought this one at 16.51 for a 54.57% gain!)
Covered SIM @ 6.92
Very happy today, whats that quote off the yahoo website ''I love the smell of profits in the morning''
Hey Don,
Quote from Don87109:
I don't have a good quantitative guideline for you, but one way to achieve black swan protection is to use options. If you have some options savvy look at buying in-the-money calls and puts to simulate long and short stock positions. This is not economical for every stock, but for hi-volume stocks that have tight B/A option spreads it has merit.
There are a couple of advantages to using options. The primary one is that your losses are limited especially in a black swan event.
Spin,
Quote from spindr0:
Hey Don,
I was thinking the same thing about using options so that Black Swan events would be a non event... tho I was initially thinking more along the lines of buying OTM protection for the equity position rather than ITM legs. On second thought, ITM with a good amount of time until expiration might have more merit due to the residual premium if the either underlying doesn't cooperate.
I was also thinking that buying the opposing option at the same strike (OTM) would also be a possible buy as protection since it would be relatively cheap, particularly if it was of shorter duration.
For example, ABC is at 40 and XYZ at 60. Instead of buying ABC at 40 and shorting XYZ at 60, perhaps buy the ABC 35c and the XYZ 65p for the pair. The protection would be buying the ABC 35p and the XYZ 65c. As long as the pair components move significantly, the premium decay wouldn't be much of an issue. W/O that movement, buying double straddles would be a problem. I guess this is another investigation to put on my "to do" list
I haven't read much of the 200+ pages posted so apologies if this is an obvious question. For the regulars, are you trading equal lots on both sides of your pairs (1 to 1) or are you ratioing them in some fashion? Thx
Got out of my IWO:IJH at 4 times away from my stop, well done.
Putting me back on red.
What was your stop?
How are you setting your stops?
One question johnysharp..in your post of updated performance through 4/22/09 (93.73% ltd), does that include the use of margin? If so, about what percentage of margin do you average about?
Thanks!
Quote from tatankas:
What was your stop?
How are you setting your stops?
whats so hard to put all these scattered trades on a spreadsheet so everyone can see easily how the big money is being made.
having to scroll through all these messages is absurd.
__________________
"Those that know ain't saying, and those saying don't know." - E. A. Neumann
A bear since 1958 and proud of it.
Quote from stock777:
whats so hard to put all these scattered trades on a spreadsheet so everyone can see easily how the big money is being made.
having to scroll through all these messages is absurd.
CVI long @ 6.69
DK short @ 8.09
Here is a promising pair. I show a potential 3.72% profit if the ratio hits half way to the mean.
PTF graphs are at extremes and the ratio is below a strong trend up. No news and earnings announcements are not until August.
Walt B
Walt, according to yahoo finance CVI beta is 2.26 while DK is only 1.19.
This could dissuade a dollar-neutral approach.
But, i have some doubts about yahoo finance beta calculation.
Any idea how many days are considered and what is the reference index?
Quote from tatankas:
Walt, according to yahoo finance CVI beta is 2.26 while DK is only 1.19.
This could dissuade a dollar-neutral approach.
But, i have some doubts about yahoo finance beta calculation.
Any idea how many days are considered and what is the reference index?
Quote from tatankas:
Walt, according to yahoo finance CVI beta is 2.26 while DK is only 1.19.
There are different ways to calculate beta.
You can use different time period and index reference.
E.g. from yahoo help page:
The Beta used is Beta of Equity. Beta is the monthly price change of a particular company relative to the monthly price change of the S&P500. The time period for Beta is 3 years (36 months) when available.
Different sites can use different methods.
Regarding the pair-trading method discussed in this thread, i think a shorter time-frame makes more sense.
1 year using daily prices, maybe. But would like to hear what the most experienced traders has to say.
I don't see the logic for using beta to balance your pair positions. Beta simply measures the volatility compared to the market, it does not indicate any directional bias. Granted, if your pair trade goes against you it might move kinda fast, but the opposite is also true if it moves in the profitable direction.
Quote from tatankas:
There are different ways to calculate beta.
You can use different time period and index reference.
E.g. from yahoo help page:
The Beta used is Beta of Equity. Beta is the monthly price change of a particular company relative to the monthly price change of the S&P500. The time period for Beta is 3 years (36 months) when available.
Different sites can use different methods.
Regarding the pair-trading method discussed in this thread, i think a shorter time-frame makes more sense.
1 year using daily prices, maybe. But would like to hear what the most experienced traders has to say.
Don,
Imagine the following scenario:
Stock A beta is 1
Stock B beta is 2
You short 1k stocks for stock A and long the same amount for stock B.
The market goes down 15% in 10 days, most probably your long side will lose more than your short side, since the beta difference.
You are in fact losing the market neutrality, just hoping the market goes up.
There are 2 options, or you adopt a beta neutral strategy (not what I am doing), or you look for stocks with similar betas.
The key point here, is to use the appropriate beta, taking in consideration your time-frame. Most probably do not make sense to use a beta calculated using 3 year of data, when our time-frame is just a few days.
That's the way i see it.
Edit: I think it's possible to have highly correlated stocks, with different betas, so relying only in correlation should not grant us market-neutrality, the most important factor in a pairtrading strategy.
Tatankas,
What you are saying is making some sense to this little head of mine. However, as I understand what you are saying, the online sites that present beta data are looking back 36 months. You suggest we look back a shorter period. Where/how is that shorter period beta data available?
Walt B
Quote from tatankas:
Don,
...The key point here, is to use the appropriate beta, taking in consideration your time-frame. Most probably do not make sense to use a beta calculated using 3 year of data, when our time-frame is just a few days.
That's the way i see it.
Edit: I think it's possible to have highly correlated stocks, with different betas, so relying only in correlation should not grant us market-neutrality, the most important factor in a pairtrading strategy.
If the correlation is very high, chances are the beta's will be extremley close anyway.... By default correlation acts as a good Beta filter..... i.e Theoretically if correlation is at 100% beta's would be exactly the same......If the Beta's are out of whack, you are probably comparing correlation and Beta over a different timeframe...
I can't see the use of comparing either of these stocks to a basket of other unrelated stocks?We are trading the relationship between these 2 individual stocks..That's it.....Not the relationship of the stocks compared to the rest of the market.
For me this just further complicates a relativley uncomplicated system.
Each to their own.. if it adds further conviction to your trading go for it!...
Quote from tatankas:
Don,
Imagine the following scenario:
Stock A beta is 1
Stock B beta is 2
You short 1k stocks for stock A and long the same amount for stock B.
The market goes down 15% in 10 days, most probably your long side will lose more than your short side, since the beta difference.
You are in fact losing the market neutrality, just hoping the market goes up.
There are 2 options, or you adopt a beta neutral strategy (not what I am doing), or you look for stocks with similar betas.
The key point here, is to use the appropriate beta, taking in consideration your time-frame. Most probably do not make sense to use a beta calculated using 3 year of data, when our time-frame is just a few days.
That's the way i see it.
Edit: I think it's possible to have highly correlated stocks, with different betas, so relying only in correlation should not grant us market-neutrality, the most important factor in a pairtrading strategy.
Thanks, I see your point. Although I think that correlated pairs tend to dampen the beta differences, you are probably correct that it still has a some effect.
Quote from tatankas:
Don,
Imagine the following scenario:
Stock A beta is 1
Stock B beta is 2
You short 1k stocks for stock A and long the same amount for stock B.
The market goes down 15% in 10 days, most probably your long side will lose more than your short side, since the beta difference.
You are in fact losing the market neutrality, just hoping the market goes up.
There are 2 options, or you adopt a beta neutral strategy (not what I am doing), or you look for stocks with similar betas.
The key point here, is to use the appropriate beta, taking in consideration your time-frame. Most probably do not make sense to use a beta calculated using 3 year of data, when our time-frame is just a few days.
That's the way i see it.
Edit: I think it's possible to have highly correlated stocks, with different betas, so relying only in correlation should not grant us market-neutrality, the most important factor in a pairtrading strategy.
Don't worry about beta. Gets things too complicated. I will be curious to see how this works out for you. I don't use PTF, but have my own spread sheets. Not sure what criteria you are using but I looked at the following:
200 day correlation: .67
Trading well within the 200 mean 2 stdev bands and also within the 13 day mean bands.
200 day average pair ratio average is .77 which will offer you some support, but the 200 day average is trending lower. Not good for going long.
The 13 day pair ratio average is .949 and also trending lower. The upper band is 1.08 and the lower band is .816. At today's close the pair ratio is still inside the 13 day bands closing at .851.
For me, ideally I would want to see the pair ratio deviate 2x from the 13 day mean before entering a trade to go long...somewhere between .77 and .816.
At this level, I would expect a snap back to the 13 day mean of .94ish. Thus the profit potential is around 16% on one side.
Hope it works out for you. I'll join you on the trade if my scenario pans out.
Quote from Don87109:
Thanks, I see your point. Although I think that correlated pairs tend to dampen the beta differences, you are probably correct that it still has a some effect.
However, a few years back I remember trying to beta weight a portfolio and after a few months I decided that beta was terribly inaccurate. At the time, the sentiment from other traders I knew was that beta figures were not useful at-least for short term purposes. This probably re-affirms your statement that it: "does not make sense to use a beta calculated using 3 years of data".
I wonder if option Implied Volatility is a better gauge than beta to adjust market neutrality. True IV is not related to market movement, rather it's just a measurement of the stock price movement relative to itself. Still, my experience says that higher IV stocks will move further than lower IV stocks relative to the market (barring a news event). And IV might be a better predictor because it attempts to forecast future volatility, which is what we need -- as opposed to beta's historical perspective. Furthermore, IV figures are influenced by option betting which means money is at stake perhaps helping IV accuracy . I'll probably experiment with this idea going forward.
Don
Quote from cooper1308:
If the correlation is very high, chances are the beta's will be extremley close anyway.... By default correlation acts as a good Beta filter..... i.e Theoretically if correlation is at 100% beta's would be exactly the same......If the Beta's are out of whack, you are probably comparing correlation and Beta over a different timeframe...
fyi, a good overview of the pairs trading process.
FREE !!!!
www.tradingwithmatlab.com/pairstrading.html
Quote from CBuster:
the above statement has a few inaccuracies. stocks with similar and high betas do tend to be fairly correlated. however, if correlation is at 100%, it does not mean the betas would be exactly the same.
to illustrate, imagine stock A always moves the same amount as the market (eg SP500) and stock B always moves 2x the market in the same direction. hopefully we can all agree that stock A beta is 1.0 and stock B beta is 2.0. the correlation of these two stocks is 1.00 (i.e. perfect correlation)
Quote from cooper1308:
Yeah that is true... I should've elaborated...
The above scenario could happen, however, In a pair trading world the ratio chart (probably the most important) would be trending...(Taboo for most pair traders)... If one stock is continually moving twice the other, I can't see this a good pair to trade as there is an obvious change in the underlying fundamentals.
Correct me if i'm wrong, but if a pair is oscillating around a mean, then a high correlation chart would have to result a close beta comparison.. A ratio can't can't stay the same if beta's are different?
Quote from Ms Varima-Garch:
paper trade, visualization-based. no make look at fundamental or news
detected spike in novartis on the finviz market map 'radar screen'
NVS -239@$42.002 (total position $10K) Novartis, Switzerland
EWL +542@$18.46 (total position $10K) Switzerland ETF
rationale:
4% spike in novartis (daily standard deviation about 1.3%)
high correlation ~87% between novartis and ewl
short major component stock against country etf
I am interested in whether pairs trading is a directional strategy or not. What are others experiences with this? I'm finding that ever since the S & P turned downwards in mid June that it has become harder to find profitable pair trades, and I keep getting stopped out of positions.
In the experiences and opinions of others here, is there a tendency for mean reversion to occur less when markets are turning down?
Quote from tradingtrading:
I am interested in whether pairs trading is a directional strategy or not. What are others experiences with this? I'm finding that ever since the S & P turned downwards in mid June that it has become harder to find profitable pair trades, and I keep getting stopped out of positions.
In the experiences and opinions of others here, is there a tendency for mean reversion to occur less when markets are turning down?
Quote from tradingtrading:
I am interested in whether pairs trading is a directional strategy or not. What are others experiences with this? I'm finding that ever since the S & P turned downwards in mid June that it has become harder to find profitable pair trades, and I keep getting stopped out of positions.
In the experiences and opinions of others here, is there a tendency for mean reversion to occur less when markets are turning down?
Quote from cipherscribe:
Hi TT,
In my experience I see the same thing. It seems like opening positions in a bullish period provides profits when the market turns bearish, and vice versa.
I generally have about 10 open positions at any one time, and a month ago I did well until the bullish period started. Now it seems my portfolio tends to do better on the bullish days.
I'd like to investigate further to see if I can somehow neutralise this experience, without over complicating things - the answer may be to just continue to open positons through all market movements to equalise things out. This I mostly do anyhow. Each time I check my portfolio has beta equivalence for longs and shorts, though I don't do this through any intention, and I don't bother to check beta's prior to choosing my pairs.
I'm still seing heaps of opportunities, and struggle not to open too many positions. Perhaps I'm not being picky enough... :-)
Adrian
Re: Re: Re: A few pair ideas
Quote from bentedges:
Since fundamentals do matter, and TXN recently raised their guidance (even if the analysts don't believe it) I have exited the long INTC, short TXN trade at a small loss. Currently the position is down 1.0%.
The long RDC, short NFX is up 1.5%, and probably still has room to go, but I have taken the trade off. If the differential expands again, I will look to put the trade back on.
The long KNDL, short PRXL is up 13.1%. I still have the trade on, but continue to trade around the position. If it only gets back to -1.0 Std Dev, that would imply an additional $3 of upside in the differential. Note it should go from a 1:1 ratio to a 4:5 ratio now.
Two ideas that came to light that I put on Friday, both that are further than 2 Std Deviations from the mean and where the fundamentals support the trade:
Long MRX, short PMTI. MRX went out Friday at $15.70, PMTI at $17.54. A 1:1 ratio is what I am using. PMTI went up huge on the FDA approval for an over the counter laser partnered with Johnny John. Even if you take the most optimistic assumptions from analysts that it could add $40 mil in revenues in 2010, the disparity doesn't make sense.
In the 'big ugly' category (my faves to trade) a long in HNZ at $36.32 and short in CL at $71.38 looks appealing. I am using a 2:1 ratio and expect this trade to eventually yield $6 in the differential.
With that, I will stop posting my ideas and cluttering up johnny's thread
Re: Great!
Quote from mlsignups:
Great job. i have you at over 150% IRR or something ridiculous like that.
FYI I'm still running > 80% IRR but my selections don't seem to make as much money as yours per trade.
But, here's something i just noticed today the last 17 trades I closed were all winners! Now I'll jinx myself.
My oldest few open ones which are typically bigger losers arn't doing bad either. Maybe i'm learning!
Mike
__________________
Profits are a byproduct of proper risk management.
Anyone engage in AMEX stocks? I have avoided that exchange for years on account of getting horrible fills.
Anyone have any good experiences lately?
Looking at GIFI/PDC, however PDC is an AMEX stock.
Adrian
Quote from neospecialist:
I don't mean to quibble but, how does one get executions at market closing prices in Nasdaq stocks? I know that you can put in MOC orders in NYSE and the specialists accept those orders 20 minutes before the close but I was unaware of any similar program on NASDAQ stocks.
__________________
Profits are a byproduct of proper risk management.
Dividend Play: stocks on the left have dividends due i.e. RSG, AXP, GD, MON, BMY, JPM. Two plays either collect the dividend or benefit from the surge leading to the dividend.
RSG/WMI 100X100 (06/29)
AXP/WU 100X100 (06/30)
GD/LMT 300X200 (06/30)
MON/SYT 200X300 (06/30)
BMY/PFE 100X100 (07/01)
JPM/WFC 100X100 (07/02)
Quote from dealmaker:
Dividend Play: stocks on the left have dividends due i.e. RSG, AXP, GD, MON, BMY, JPM. Two plays either collect the dividend or benefit from the surge leading to the dividend.
RSG/WMI 100X100 (06/29)
AXP/WU 100X100 (06/30)
GD/LMT 300X200 (06/30)
MON/SYT 200X300 (06/30)
BMY/PFE 100X100 (07/01)
JPM/WFC 100X100 (07/02)
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
New trade;
Long SNY/AZN @ 0.67
Just a quick update and question.
I'm using PTF to trade UK stocks and have been doing so now for a couple of months. Because of my limited resources most of the trading is via spreadbetting combined with a few CFDs. I've gradually become more refined in my trades and they are now 74.5% profitable. However, there are fewer trades but I'm still up around £3000. So things are still going well, better as time goes on in fact.
Now, I'd like to be able to quantify my 'edge' but I'm not certain how to calculate this for spreadbetting. Does anyone out there have a method for doing this or have a link to a relevant webpage ? Any help would be appreciated.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
OUT SNY:AZN @ 0.65 from 0.67.
Stop was hit @ 0.64 and I got out on the pullback.
This is probably the wrong way to do it. lol
hi guys, i am make look at the following couple now:
MBT (Russian cell operator, adr)
VIP (Russian cell operator, adr)
i am not have the access to pair software. the stocks are highly correlated, but the spread seems to be all over the place
if anyone make look at it, can you say who is above whom and if tradable now?
thanks
Quote from total_keops:
OUT SNY:AZN @ 0.65 from 0.67.
Stop was hit @ 0.64 and I got out on the pullback.
This is probably the wrong way to do it. lol
Quote from Ms Varima-Garch:
hi guys, i am make look at the following couple now:
MBT (Russian cell operator, adr)
VIP (Russian cell operator, adr)
i am not have the access to pair software. the stocks are highly correlated, but the spread seems to be all over the place
if anyone make look at it, can you say who is above whom and if tradable now?
thanks
Quote from colonelangus:
the spread with a ratio of .35MBT - VIP has been from -.25 to 4.75 in the past 6 months. it is now at 1.25, down from yesterday's close of 2 so in the lower range with MBT long. i didn't check the news on them.
Quote from colonelangus:
the spread with a ratio of .35MBT - VIP has been from -.25 to 4.75 in the past 6 months. it is now at 1.25, down from yesterday's close of 2 so in the lower range with MBT long. i didn't check the news on them.
Quote from Dr Who:
Just a quick update and question.
I'm using PTF to trade UK stocks and have been doing so now for a couple of months. Because of my limited resources most of the trading is via spreadbetting combined with a few CFDs. I've gradually become more refined in my trades and they are now 74.5% profitable. However, there are fewer trades but I'm still up around £3000. So things are still going well, better as time goes on in fact.
Now, I'd like to be able to quantify my 'edge' but I'm not certain how to calculate this for spreadbetting. Does anyone out there have a method for doing this or have a link to a relevant webpage ? Any help would be appreciated.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
Quote from cipherscribe:
Damn! That's some tight stop you've got working there. I looked at the pair, and it's very nice imo.
Are your stops working out for you?
Adrian
total keops, I'm not certain which would be the best parameter for me to most accurately reflect how I'm doing. I suppose I'm most used to ROI but I can't see how this can be expressed when you're spreadbetting because the amount you're risking seems to me to be variable.
I was hoping some bright spark who has a history in spreadbetting may be able to show me the way.
As it happens I'm at a point where a few friends have decided to join me and are happy for me to create a joint trading fund which I will manage. Like a mini hedge fund. Together we're likely to be able to amass around $50K so I'll be able to get my IB account working.
Still, I'd be interested to know the best way to express ones 'edge' when spreadbetting.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
total keops, I'm not certain which would be the best parameter for me to most accurately reflect how I'm doing. I suppose I'm most used to ROI but I can't see how this can be expressed when you're spreadbetting because the amount you're risking seems to me to be variable.
I was hoping some bright spark who has a history in spreadbetting may be able to show me the way.
As it happens I'm at a point where a few friends have decided to join me and are happy for me to create a joint trading fund which I will manage. Like a mini hedge fund. Together we're likely to be able to amass around $50K so I'll be able to get my IB account working.
Still, I'd be interested to know the best way to express ones 'edge' when spreadbetting.
Thanks. My PF is 3.36 but I'm used to a percentage return number but can't get to grips with how I can calculate a ROI for a spreadbet.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
Thanks. My PF is 3.36 but I'm used to a percentage return number but can't get to grips with how I can calculate a ROI for a spreadbet.
Thanks CBuster. Yes, I suppose that's correct and I'll see how it works out.
I'm pleased with the PF but as I've only made 90 or so trades, its early days yet, though at the moment my picks are getting more accurate rather than less, as I hone my system. But hey, perhaps I'm just having a lucky start......
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Something I've recently been reading about (and please excuse me if this has already been dealt with) is the 130/30 trading bias, where people have been trading with a long bias rather than being market neutral, like my strategy. I think the theory is that because the longterm trend of the stock market is up, its more profitable to have a long bias.
Does anyone using PTF use a trading bias or is everyone market neutral ?
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
130/30 has nothing to do with pairs trading.
In 130/30, they take 30% leverage with the proceeds from 30% short positions. The net is 100% long.
Point taken.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Passing DIA:OEF, risk/ratio too low.
Passing BJS:SPN, I dont like the stock charts.
BJS:SPN looks interesting, although SPN tends to be a more volatile and higher beta stock than BJs or HAL.
This looks to be a good example of a trade whereby you need to introduce some beta hedging into affairs.
Please see the following threads on the same topic, they might help you:
http://www.elitetrader.com/vb/showt...threadid=153854
http://www.elitetrader.com/vb/showt...threadid=119836
__________________
Do Better Than Yesterday!!
Live happier than Yesterday!!
I am very new to Pair Trading and I would like to know more about it. What is most import factors for Pair Traders to pick up stocks, for example, one of factor I know is correlation of two stocks?
__________________
james
BJS/SPN does look like a decent short, there is a nice fundamental edge there as well
been away for a little bit guys, some interesting conversations going on, glad to see the thread is alive and well.
There are so many different ways to pair trade, the opportunities are really limited to one's own imagination. For example you could pair up the Australian 10yr bond with the US 10yr bond then pair that ratio against the AUD/USD fx rate, ive seen charts of this and this synthetic pair is well correlated, produces good trading opportunties and are some of the most liquid traded markets in the world, or another idea is that you may be bullish on oil and go long energies and short airlines, you could basket the 2 groups together to create one ratio and trade off that. Lots of potential strategies out there, I think thats what really good traders do, they have a system but they know when to up size, down size, not trade, act responsively or seek out special situations.
In case you guys don't know PTF just released another update, pretty good improvements, they have improved backtesting, allow for custom exits based off the +/- value, time based stop, a new triggers window to see all recent trading signals, removed a few bugs and have added the ability to have the trading signals sent to your inbox or twitter channel for alerts, ive set it up to be notified by email, much easier to be alerted to potential trading opportunities that way and I receive them on the go aswell, very happy they have done this.
Thanks for that jonny.
While PTF works well for finding opportunities there are still some gaping holes in the software, not least never being notified when there is an update - not even an email. I appreciate the work thats gone into the software but the developer seems to march ahead without fixing some of the more fundamental issues.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
Thanks for that jonny.
While PTF works well for finding opportunities there are still some gaping holes in the software, not least never being notified when there is an update - not even an email. I appreciate the work thats gone into the software but the developer seems to march ahead without fixing some of the more fundamental issues.
Quote from jonnysharp:
been away for a little bit guys, some interesting conversations going on, glad to see the thread is alive and well.
and have added the ability to have the trading signals sent to your inbox or twitter channel for alerts, ive set it up to be notified by email, much easier to be alerted to potential trading opportunities that way and I receive them on the go aswell, very happy they have done this.
You'll need to make sure you have the latest version. I think the Alerts started with V2.2f (which is what I currently have) but is no doubt on the later versions (if there are any).
If you have that version or later click on the 'pear' icon top left and down to 'Alerts Configuration'. Then you can set up Email, Twitter and CSV alerts (whatever they are).
If you dont have the latest version just email support and they'll send you a link.
Personally I think they should build in automated updating into the app and hopefully that will come eventually.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
One thing I've noticed which varies across pairs, is how the pairs behave for the few days after an indication to enter from PTF.
Some consistently widen in their spread for a couple of days before reverting to their mean. Then again, some consistently don't.
So it may be prudent to see how your pair has behaved in the past to maximise the return.
Its certainly working for me as a couple of pairs always widen for at least two days after an enter signal and I've been able to get much better prices by hanging fire for a couple of days.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Dr Who....
I've just loaded some LSE stocks into my PTF as LSE opens about the time I finish work. However, on my first triggers I noted the prices went from 400 quid to 4 quid in a day or 4 quid to 4p in a day or I was missing a week or more of data.
Are you using Yahoo data for your analysis? If so have you experienced these problems?
Thanks,
oby
Yes, I use Yahoo and no, I havent seen these issues.
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
A few people here have mentioned running PTF on more than one PCs - e.g. one copy for pairs research/backtesting and the other for signals. Personally, I'd like to have a copy on my home PC running 24/7 and a copy on my notebook which I'm taking with me everywhere.
Are you doing this with trial or paid copies? Is it allowed/tolerated by PTF?
Many thanks for your input!
Quote from jonnysharp:
For example you could pair up the Australian 10yr bond with the US 10yr bond then pair that ratio against the AUD/USD fx rate, ive seen charts of this and this synthetic pair is well correlated, produces good trading opportunties and are some of the most liquid traded markets in the world
Jonny--What happened with that OSIP/CELG trade from June 1? Did I miss that result?
Quote from PCanyon:
Jonny--What happened with that OSIP/CELG trade from June 1? Did I miss that result?
__________________
"He was looking for the card so high and wild he'd never need to deal another "
Leonard Cohen
Quote from Dr Who:
Unless he got out, this is currently a huge loser.
CELG Sell 42.60 (current 47.32)
OSIP Buy 30.31 (current 27.71)
Hopefully he managed to get out quickly, although it immediately went into negative territory after it was indicated as a trade.
Shame that because this pair had a 100% record prior. Thankfully I didn't do it as I only do UK stocks and for some reason UK stocks don't seem to have the same volatility.
Yes I exited that pair at a loss, ive been light on trading lately, and have spent some time re-doing my radar, fresh backtests, removing old pairs and adding new ones
Sold OSIP @ 27.71
Covered CELG @ 47.32
Sold SPG @ 50.05
Covered TCO @ 25.24
Sold AHL @ 23.41
Covered MXGL @ 18.20
Quote from sysre:
Interesting idea. But you've got a bond spread versus an FX pair - wouldn't transaction costs eat into any gains? How long would each of these positions last?
What kind of Z-Score would you be looking at? 20 day? 200day?
Jonny,
Quote from jonnysharp:
Yes I exited that pair at a loss, ive been light on trading lately, and have spent some time re-doing my radar, fresh backtests, removing old pairs and adding new ones
Sold OSIP @ 27.71
Covered CELG @ 47.32
Sold SPG @ 50.05
Covered TCO @ 25.24
Sold AHL @ 23.41
Covered MXGL @ 18.20
Quote from jonnysharp:
Wednesdays trade
Long WWW @ 14.49
Short NKE @ 42.55
Just a general newbie question to the PairTradeFinder users.
Most of the stat arb papers use "cointegration" as the test for mean-reversion to find potential pairs. However, PTF uses only simple linear correlation to scan. What's your experience with mean-reversion behavior from pairs found by linear correlation? According to academic theory, cointegration should be used to find mean-reverting pairs, but I am curious to what people have to say with practical experiences.
Thanks
Quote from ezbentley:
Just a general newbie question to the PairTradeFinder users.
Most of the stat arb papers use "cointegration" as the test for mean-reversion to find potential pairs. However, PTF uses only simple linear correlation to scan. What's your experience with mean-reversion behavior from pairs found by linear correlation? According to academic theory, cointegration should be used to find mean-reverting pairs, but I am curious to what people have to say with practical experiences.
Thanks
New one:
Short KGC:HMY @ 2.05
Quote from total_keops:
New one:
Short KGC:HMY @ 2.05
- AMGN@$60
+ XBI@$47.5
1:1
I don't know how to program a spreadsheet macro, but if I did, I would make one that would link to my broker (IB) and close a pair when the ratio hit my target. Unattended. Even better, when the ratio hits the target, trailing stops would be issued to allow profitable positions to run.
Can someone write a script for this? I wish IB would allow this order type.
Walt B
New one: short LPL:MOLX @ 0.93
Passing/following: ENH:MRH, HSC:CRS, AES:FST.
I think that the IB combo order will do most of what you want. Although I am not sure about the trailing stops angle.
Quote from waltbx:
I don't know how to program a spreadsheet macro, but if I did, I would make one that would link to my broker (IB) and close a pair when the ratio hit my target. Unattended. Even better, when the ratio hits the target, trailing stops would be issued to allow profitable positions to run.
Can someone write a script for this? I wish IB would allow this order type.
Walt B
¸
Quote from waltbx:
I don't know how to program a spreadsheet macro, but if I did, I would make one that would link to my broker (IB) and close a pair when the ratio hit my target. Unattended. Even better, when the ratio hits the target, trailing stops would be issued to allow profitable positions to run.
Can someone write a script for this? I wish IB would allow this order type.
Walt B
Quote from Don87109:
I think that the IB combo order will do most of what you want. Although I am not sure about the trailing stops angle.
Don
Quote from total_keops:
¸
Walt, for the take profit you dont need to write code or any macro. Some simple formulas in Excel could do it. if you use the IB Excel API sample.
....And, youu need the TWS openned all day on the computer, therefore, you can't access the account from somewhere else.
I have tried to manually get the 'generic combo' to work with stocks. I can create the combo, but rarely get any worthwhile bid/offer prices on the instrument. Sometimes I have set limit orders on these combos, seen prices fall outside the trigger price, and yet not get the order filled. Very Unreliable. Stick the the stocks themselves, and code that way.
Quote from waltbx:
I've read here before that the IB Combo Order will work with stocks, and I've tried it w/o success. I've also read the TWS helps and I can't enter stocks into a Combo Order. Options only. If you can make it work, would you give me a brief tutorial? Can it be set to activate an order when a ratio hits a mark?
Walt B
I use the combo order everyday with good success.
Quote from waltbx:
I've read here before that the IB Combo Order will work with stocks, and I've tried it w/o success. I've also read the TWS helps and I can't enter stocks into a Combo Order. Options only. If you can make it work, would you give me a brief tutorial? Can it be set to activate an order when a ratio hits a mark?
Walt B
Hmmmmmmm
http://www.ripoffreport.com/reports...pOff0442954.htm
Is this the software you guys are talking about?
Quote from Vespasian:
Hmmmmmmm
[url]http://www.ripoff
Is this the software you guys are talking about?
Quote from Vespasian:
Hmmmmmmm
http://www.ripoffreport.com/reports...pOff0442954.htm
Is this the software you guys are talking about?
__________________
It is not the critic who counts, nor the man who points out how the strong man stumbles; The credit belongs to the man who is actually in the arena-whose face is marred by dust and sweat and blood - who errs and comes short again and again... so that his place will never be with those cold and timid souls that know neither victory nor defeat. -Theodore Roosevelt
Quote from Ms Varima-Garch:
- AMGN@$60
+ XBI@$47.5
1:1
Trading pairs in a tight range is not very rewarding. Best method is go with a strong edge and trade naked or scalp a liquid pair.
make look at:
-GIS
+PEP
1:1
probably pass because not know where is ratio, if it far away from mean.
finviz and gummy say GIS go far away from PEP, but maybe not too much
Quote from waltbx:
Hmmmm. Must not be, as I directly OWN the software sold to me (and it has made me thousands!) A ponzi works differently. My continuing profit does not rely on the need to find new investors.
You might instead dog medicare and social security in the USA, however. Those are government backed ponzis that are worth mentioning.
Walt B
Quote from Walt B:
I directly OWN the software sold to me (and it has made me thousands!) A ponzi works differently. My continuing profit does not rely on the need to find new investors.
[QUOTE]Quote from Vespasian:
So whats the link to your site then ?
PTF
Does anyone have alink for the latest version of PTF. The one on their website does nto have the time based exit and the other features mentioned here recently.
Quote from Don87109:
I use the combo order everyday with good success.
Best way to create a combo is to drag each stock from the main screen to the combo window.
You can create ratio orders although you must use whole numbers. You cannot say buy 1.5 of stock A and sell 1 of stock B. You must say buy 3 stock A and 2 stock B.
Don
Re: PTF
Quote from ascheer7:
Does anyone have alink for the latest version of PTF. The one on their website does nto have the time based exit and the other features mentioned here recently.
paper trade, testing Deutsche Bank SHORT against European equity index, Siemens, or oil
rationale: above-average spike in DB price
source of idea: finviz visualization maps. looking at DB volatility, and peer group performance.
DB DEUTSCHE BANK AKTIENGESELLSCHA -163@$61.52
against either of:
a) IEV ISHARES S&P EUROPE 350 INDEX F +330@$30.32
b) SI SIEMENS AKTIENGESELLSCHAFT +151@$66.24
c) USO UNITED STATES OIL FUND LP +307@$32.69
about the new version:
Yes we have just released an updated version. Please un-install your current version then download from www.pairtradefinder.com/PairTradeFinderSetup.msi then refresh all your pairs in the console. You will see a new trigger window for recent trading signals, custom exits based on the +/- in the preferences, also time based stop, you can backtest different settings and use the column tallies to see the sum/average, also we have email/CSV/twitter alerts, enabling you to send trading signals instead of watching the program. We have found using a 12-15 day time stop to significantly improve performance, especially reducing the size of big losing trades.
email notification doesn't work for me though - still waiting for the reply from Jared
Maybe I don't understand you, but the combo order does let you set a price for the combo, not for each leg as you stated.
Quote from waltbx:
Thanks, that helps in figuring out how to get into the trade.
IB 's combo order uses share quantity ratio for entering the pair, not price ratio for exit, as I understand it.
I'm still looking for a way to set a system that will automatically (unattended) close out a pair at a price ratio, and not at a specified value for each leg of the pair. Say that I go into a trade with a Ratio = 1.5. Dollar neutral. I want to set an order to close out both sides when the price Ratio = 2.00. (Or better, set trailing stops) That could happen with many different prices/leg. I'm interested only in when the price ratio hits 2.00, not individual leg prices.
How to do that automatically?
Walt B
And, youu need the TWS openned all day on the computer, therefore, you can't access the account from somewhere else
--------------------------------------------------------------------------------
yes you can
One acc.can have have two different user names and have them
running from different siteswith IB
cheers john
Quote from Midas:
Correct me if I am wrong, but anyone can file a "rip off" report on that site including anyone with an ax to grind or sour grapes.....
__________________
Profits are a byproduct of proper risk management.
Re: PTF
Quote from ascheer7:
Does anyone have alink for the latest version of PTF. The one on their website does nto have the time based exit and the other features mentioned here recently.
__________________
Profits are a byproduct of proper risk management.
Closed LPL:MOLX @ 0.90 from 0.93 for a small profit.
If anyone of you is using cointegration, how far back to you look? I was thinking about a year.
yes that report was good for a laugh, sounds like jealous competition, maybe not, someone with a grudge.
yeah they removed portfolio mgr, apparently they were getting negative feedback and are going to develop it further before including it, I use a spreadsheet anyway, never found their portfolio mgr to be useful, just really use the program for backtesting, signals and charting.
someone a few pages back asked whether market conditions are conducive for profits or not, and I think the answer is yes, I know Jared has been on the sidelines recently with his trading, he reckons the market is at a turning point, with a chance of going back down, which I think is right, I think this will be a ''W'' shaped recession oppose to the popular ''V'' shaped recession theory. Ive found in my own pair trading PnL comes and goes in waves, you can be flat for weeks in a soft patch then BOOM overnight all of your pairs snap back quickly bringing in large profits, I guess you just got to hang out for that to happen, I try and look at and judge my results quarterly, so Im not placing too much pressure on myself to perform every single week or month, run it more like a business that reports quarterly. Great business to be in that's for sure, we can work anywhere in the world
HI Johnny,
Curious if you have found, like I have found that extreme readings on the % from mean are more reliable. For example, I have taken trades where the standard deviation went down while the % from mean had increased to extremes.
Had I entered on the extreme std dev reading I would be sitting in the red even though the std dev had come down because the percent from mean had gone up.
Which brings me to a question, how can the standard deviation on the trade go down while the percent from mean increase.
Nick
__________________
Profits are a byproduct of proper risk management.
hi guys,
i'm thinking about putting on the following trade next week, using actual hard earned dollars:
+ SMH semiconductor etf
- TXN texas instrument
i think the spread should increase, both stocks are at about $21 currently.
does anyone have any ideas on this pair? is it better to stay on the sidelines now because of earnings?
looks like a good pair to me, but i'm a little nervous about the timing
thanks
Quote from NKNY:
HI Johnny,
Which brings me to a question, how can the standard deviation on the trade go down while the percent from mean increase.
Nick
Here is a scenario for discussion.
What would you do?
Let's take freight services, ie UPS FDX EXPD & CHRW. They are all good correlation stocks.
FDX has already given earnings and wont again before autumn. UPS gives earnings on 23 July. CHRW gives earnings on 21 July. EXPD gives earnings on 4Aug BUT has already given guidance on July 10 and it was negative. So we can assume EXPD earnings are now already 'in the price'.
So to avoid holding position over upcoming earnings/guidance, we could avoid CHRW & UPS, and take FDX/EXPD, even though CHRW/EXPD & UPS/FDX are the better pairs.
Quote from tradingtrading:
Here is a scenario for discussion.
FDX has already given earnings and wont again before autumn. UPS gives earnings on 23 July. CHRW gives earnings on 21 July. EXPD gives earnings on 4Aug BUT has already given guidance on July 10 and it was negative. So we can assume EXPD earnings are now already 'in the price'.
Passing CMC:SRS and JBHT:WERN but following.
Quote from CBuster:
personally i would not assume that the EXPD earnings are in the price. guidance and actual results are often pretty disimilar. i am trying not to hold any pairs over known upcoming news events like this.
Here's the main problem I see with trading pairs.
Your looking for something to STOP happening and go back to so called "normal" or mean revision.
In my experience the market can stay abnormal far longer then my bank account in most cases.
How do you deal with this issue ?
Quote from Vespasian:
Here's the main problem I see with trading pairs.
Your looking for something to STOP happening and go back to so called "normal" or mean revision.
In my experience the market can stay abnormal far longer then my bank account in most cases.
How do you deal with this issue ?
agreed....the 2 ways I used to look at it:
Time stop = exit date - trade date
when Time stop = 0; get flat
Stop Price (Cost basis) =< Price + transactions costs + debit interest - ECN rebates - lending rebates; get flat....debit interest can get high so need to include it.
__________________
autospreader(dot)blogspot(dot)com
Long MGG @ 21.04
Short EEP @ 41.63
Quote from henderson:
agreed....the 2 ways I used to look at it:
Time stop = exit date - trade date
when Time stop = 0; get flat
Stop Price (Cost basis) =< Price + transactions costs + debit interest - ECN rebates - lending rebates; get flat....debit interest can get high so need to include it.
Quote from saico:
PTF uses a ''moving'' mean, not a static. In addition to that I use a 10 day time stop. I dont see that problem, Vespasian.
What has the greatest volume, the open or the close?
Quote from Vespasian:
May I ask your worst draw down with this approach and why specifically 10 days?
Thanks
Quote from cipherscribe:
What has the greatest volume, the open or the close?
Quote from CBuster:
This occurs because standard deviation in this case is not constant. In fact, the measure of standard deviation being used by PTF, or any use of bollinger bands etc (i.e. standard deviation from a moving average) exhibits serial correlation.
What S.D basically measures is how far from the average the ratio "usually" is. This means that as the ratio moves away from the average, and the longer it stays away, the more SD rises. This ultimately means that on any given day, SD can rise or fall by more than the ratio itself which in turn means that the % from mean can get bigger but num SDs can get smaller.
So mathematically it is understandable. But I totally agree that interpretting this situation can be a little tricky. If you are looking to add layers to a trade, should you do it as % from mean increases or num SDs goes up...