Pair trading ES/NQ

Discussion in 'Strategy Development' started by Trend Fader, Sep 20, 2005.

  1. Just curious if anyone trades pairs vs. the es/nq.... if so what types of profitable strategies does one use... anything to look for in particular?
  2. bobcows


    Very interesting topic. I tried it several years back and could not get it to work. I am sure it can be done, but I found to much noise between the ES/NQ contracts for intraday trading to work. Maybe a longer time frame is needed.
  3. used to be overnight there was an approx 1-2 correlation

    ( i.e. ES up 1 point and NQ up 2-2 1/2 points )

    not sure if this is the same way overnight these days
  4. can this be traded intraday or swing traded for a few days?
  5. Not a Pairs Trading expert, but I have been thinking about it. I suspect the longer time frames will yield the best profits. I have not looked at intraday spreads.

    Your question intrigued me, so I did a little exercise with daily data. The white lines on the Spread Ratio of ES/NQ are an estimated 1 Standard Deviation from the Spread Ratio Average or Neutral value. When the Spread is above the +1 Standard Deviation Line, you Short ES and go Long NQ. Conversely, when the market is below the -1 Standard Deviation Line, you Short NQ and go Long ES.

    The object is to hold the position until the market goes back to Neutral, which it looks like it takes about 1 to 1.5 months to achieve. With 1 emini contract each, Trade 1 achieved a $1380 profit, and Trade 2 achieved a $780 profit.

    I may look at intraday later.

  6. This may be as good as an intraday pairs trade gets with ES and NQ. On the 60 min chart for 9/14/05, 1 emini contract each (short NQ - long ES), yielded a $130 profit.

  7. Charles,

    Do you think replacing the ES with a more fluid product (YM or ER2) would increase or decrease the occurrence of intraday setups using this methodology? By "fluid" I mean that those contracts move a little more easily in a shorter time scale due to the relatively smaller tick size -- I'm not equating "fluid" with "liquid".

    Thank you.


  8. I think 2nq for 1es.. is an equal hedge... try doing it like that..

    good thread..
  9. Neodude


    I believe a once popular strategy that is a derivation of this was the "unilateral pair trade". It consisted of taking only one leg of the pairs being traded, usually the more volatile of the pairs. So for example if there is a correlation between index A and B, you would either buy or short one of the more volatile of the two when it reached a 2 point STD and then wait for it to return to normal. Backtest it on the Qs and the SPY to see what happens.

  10. Trend Fader,

    I believe that you are correct. This changes the Trade 1 amd 2 profits to $2960 and $3660, and the intraday profit to $510.


    The ER2 - NQ pair, seems to take almost a week to return to neutral. Both seem to be highly correlated a week at a time. However, with the right timing and patience, some trades can yield $250 profit (short 1 ER2, long 5 NQ).


    These markets do not appear to go much beyond 1 standard deviation. But if they did, I believe that you are correct in that this would be a good trade.

    #10     Sep 21, 2005