I'm only familiar with [tried] cash neutral, correlated pairs trading. Non-guessing, if you will. Here, I would be concerned about AAPL volatility, but here I'm just guessing. And I forgot, Apple makes computers don't they?! Look, I don't know how to trade, so I just try to teach other unsuspecting souls. marc
It always bothers me whenever I hear pair trading questions that identify positively correlated pairs when negative correlation <-0.9 is a necessity to have a pairs trade. Positive correlations you shouldn't expect to be profitable because the directions are the same, and unlikely to move opposite of each other before that. In the op's question I know AAPL and DELL are positively correlated and not very strongly, so they wouldn't be good candidates because their correlations are not high enough and there is no such thing as a pairs trade based on fundamental analysis. Just because one company might be better than another is no reason to long the favorite, short the laggard, because they'll still probably move together and pair trading is more of a quantitative characteristic of two securities, so pulling two companies simply because they're in the tech sector is not why you'd put a pairs trade on. Finding high enough correlations is a necessity for profitable pairs trading, and impossible without extremely high correlations because it is a state of quantitative modelling more than it is a fundamental guess as to which company's prospects are higher. Pairs Trading is a numerical evaluation based on correlation, not related at all to anything fundamental but only to the correlation of other securities.
So trade them LONG/SHORT. Come on Bowo, you're smarter than that. Ok. Perhaps you shouldn't trade pairs. ??? Didn't your CFA exam cover relative value analysis within a sector? Against like-peers & competitors?
That is certainly one methodology, but we find that we consider market sector and market cap in addition to statistical fitness - the performance and consistency in modeling is so much better.
I gave up revert to mean pairs trading as i determined all it was is a market neutral top/bottom picker strategy! Which as most know is a waste of time...
Just anotherway to skim the cat! U have to find your way to make some cash In this biz , but please dont jump arround , stick With one method and learn the ins and outs!
I agree about the mean reversion aspect, but if you can get multiple timeframe confirmation on a fresh trend development that would certainly be superior to calling a 'top' or a 'bottom' as it were. In other words, let the deeper pockets do the heavy lifting and turn the market.