It looks like you have a very nice pairs strategy here. I have been following the thread for a few months with interest, and due to that, took a trial of the software. A few questions: Are you actually trading the strategy at posted prices? The reason I ask is because with the long CLR, short ESV trade, they were put on at exactly the prices in the pairtrade finder. It is my understanding that the data is free from Yahoo, and that comes with a 20 minute delay, so how are they able to be put on at those prices on the close when posted when the signal wasn't generated at those prices until the close? Also, in regards to this particular pair, have you looked at the fundamentals? Again, I am not at all trying to be disrespectful, just trying to follow along and understand. Do you look at the fundamentals and valuation, balance sheet, etc before putting on a trade? In this particular pair, while it may have moved 'X' amount from the standard deviation, the underlying valuation and fundamentals DO support it. ESV is trading at 8x forward estimates, while CLR is trading at 40x forward estimates. Price to book for CLR is 5.38, while it is 1.09 for ESV. Enterprise value to EBITDA for CLR is 8.8, while it is 2.8 for ESV. Looking at the growth component, they seem to have similar growth characteristics when looking forward, but over the past 5 years I see 0% growth for CLR, while ESV has had 64% earnings growth. Sales growth over the past 5 years is very comparable, with ESV outperforming by about 2%. Perhaps something to do with the high insider ownership at CLR, and the many options they grant their board that dilutes shareholders? Looking at the balance sheet, I see ESV has $6.50 a share in cash, and virtually no debt, giving them a current ratio of 3.5, while CLR has virtually no cash on the books and a current ratio of 0.82. In an extended bad period, ESV will be fine while CLR will have to find a way to fund operations. In addition, ESV is projected to grow earnings at the rate of 17% over the next 5 years versus CLR at 10% (and based on prior performance, that sounds a bit optimistic.) My point isn't to beat you up; on the contrary, it is to understand if you are only looking at the signals and taking them as PT finder backtests suggest. If you follow Jared's mantra by putting $10k total in each pair, I can see based on today's closing prices that would equate to a gain of roughly $162 (excluding commissions)...it would seem to me to be wise to take that unless you follow these completely mechanically. In full disclosure, I actually took the other side of this trade today, buying ESV and shorting CLR on a 1:1 basis (they have roughly the same ATR.) I shorted CLR at $27.83 and bought ESV at $36.22, which basically puts me flat in the trade thus far. I have left room to add an additional 2 layers (in fact, I hope the spread comes in) in the $6.50-$7.50 range. I have a hard time believing this not only works in the near term, but as a hold over the next several months for 8-10 points. Enjoy the journal, keep up the good work.
Closed 2 trades Sold MET @ 31.12 Covered PRU @ 39.46 Sold PNW @ 27.25 Covered EDE @ 15.58 New trade Long ISBC @ 8.32 Short HBCK @ 12.50
Yes it was one of my longest opened trades, most trades open longer than 15 days tend not to be profitable, however the loss can be smaller waiting for it to come back to the mean, I do know the guys at PTF are developing a time based stop and Im keen to backtest this aswell, probably will employ a 10 day time stop.
Bentedges, yes Im trading at the posted prices, I have IQfeed in PTF, so Im using real time data, I look for signals 30mins before close, I then execute right before the close or place MOC orders, then take the screenshot after market close, hence the closing prices shown. I am following the signals strictly, I don't look at fundamentals because Im only playing the technicals, I don't fundamentals come into play too much in short term trading.
I don't mean to quibble but, how does one get executions at market closing prices in Nasdaq stocks? I know that you can put in MOC orders in NYSE and the specialists accept those orders 20 minutes before the close but I was unaware of any similar program on NASDAQ stocks.
I get MOC orders on NASDAQ stocks through IB no problems. Most of the the time the execution price is the closing price.
Most of the time? Is somebody actually handling the order manually? I am not trying to beat this to death, but is this an IB application that is exclusive to them, or can anyone achieve this trading through other firms?
Neo, As I understand it, MOC orders are independent of broker. The exchange offers what is known as a closing auction. This auction can sometimes be an execution spread of prices, with the average being the closing price listed on Yahoo. Ie sometimes you will get an improved/reduced price respective to the stated closing price. In my experience, most of the time it's the stated closing price, but occasionally there is a slight difference, nothing I ever worry about. Hope that helps. Oh, and btw, NASDAQ MOC orders only have a 10 minute submission rule, not 20 minutes, like NYSE. (As per my IB documentation).
Correlation has not been a valid filter criteria in my trades. I've been pair trading with real money since March 5 using PTF. I've completed 66 trades averaging 3% ROI per week, except for the last week which has been a bummer. The average correlation of the pairs in my 44 profitable trades has been 57%. And for my 22 losing trades has also been 57%. I do not consider correlation in my choices, either when setting up my pairs, or when entering the trades. Five of my profitable trades had negative correlations at the time I placed the trade (for returns of 18%, 8%, 6%, 6%, 3%) . All of my losing trades had positive correlations. Correlation does not seem to be a factor in profitability. My initial pair choices are made using profit history. I look for pairs that have a history of over 90% profitable trades in the last year. Correlation is irrelevant, as I see it. I do choose pairs that are in the same industry. Cointegration seems to be more significant. Problem is, it is far easier to find pairs that are correlated, than cointegrated. But correlation does not seem to be a factor in the 66 pair trades I've made since March 5. I know this is radically different from the basic premise of pair trading. But after 66 pair trades, I think my statistics have some validity. Or perhaps there is something unique about the limited period I've been trading? Any thoughts? Walt B