How do you do triangle trading(generalized pairs trading)?

Discussion in 'Strategy Development' started by losemind, Jul 19, 2011.

  1. losemind


    Hi all,

    In pairs trading we have 2 assets. lets say now we have 3 assets moving together... how to generalize the pairs trading and do triangle trading?

    Thanks vm!
  2. GG1972


    Goog is a $600 stock for a reason
  3. Lucias


    I would imagine you could treat 2 of the assets as a synthetic, as a single instrument. You would find some ratio between the 2 and then the third.

    i.e you might do

    50% in A
    and 50% in B+C

    You would probably do this with baskets of stocks though that have a fundamental relationship. You would need a high capital and leverage and low fees to take advantage of such opportunities. Just thinking about this, you might combine various instruments together to form your synthetics based on sector..

    So take all the healthcare and you form your synthetic healthcare and then you compare to other synthetic segments. Or maybe you take say all the tech stocks and short the group as whole but pick the strongest and go long them in same ratio.

    So for example,

    Long Leading Tech
    Short All Other Tech

    The risk to this strategy is that you are probably concentrated in a few top performers. Another strategy

    Long Leading Tech
    Long Beatdown Tech
    Short All Other Tech