ACD witha Pair Trading Spin - Thoughts?

Discussion in 'Strategy Building' started by FaderTrader, Feb 15, 2006.

  1. I've been trading for a few years now and about one year ago, got the "aha" moment. It was following my second read of The Logical Trader.

    Obviously, the Opening Range concept is extremely valuable, but I've had some difficulty implementing it because of the following:

    1. Inside days. On days where it's profitable to sell the top of the OR and buy the bottom of the OR, the ACD method simply does not work. I feel that always buying and selling up and downside breakouts is exposing me to too much risk and hence, I pass on too many of the perfect scenarios that Fisher highlights.

    2. I only trade stocks. Fisher himself recognizes that the ACD system is markedly enhanced when trading multiple markets because the breakout in the 1 or 2 will more than compensate for the stops being hit in the other 1 or 2 markets. Since I only trade stocks, I've found it tough to get a handle on this problem. At first, I looked for stocks that were uncorrelated. The problem with this is that when a really hard rally, selloff, or reversal takes place, my positions tend offset one another.

    I'm trying to figure out a way to minimize my losses on inside days by hedging the long and short side and then getting stopped out of one in the event of a breakout. Here are the open questions.

    1. On inside days...
    -- Short the top and buy the bottom of the range. If it breaks out in either direction by X, then the loser closes (standard ACD)... but what's a good volatility measurement??
    -- These are the days I'm comfortable with making no money.

    2. On trending days...
    -- The losing side gets stopped out on the breakout and I chop most of the move that day.
    -- The losing side simply gets stopped out. These are the days I'm looking to make money.

    I'd appreciate any thoughts on this - specifically from those who have ideas about how to calculate the C and D values so as to not get thrown out of the market on inside days (I want my positions to offset each other until a breakout occurs). Those are the days when I'm currenly getting killed. I'd be quite happy with making $0 on inside days.

    Thanks.