Registered: Jul 2007
08-24-08 04:35 PM
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.