I like to layer as well. The key here is to break up your normal position into the number of layers. For example if my normal line is 7k per side on a few of my pairs (or the equivalent $ neutral amount) and since we are rarely perfect in our entry I might get to the full line like this: Layer 1: 1,000 Layer 2: 2,000 Layer 3: 4,000 with a set stop loss area aprox. the same distance the last 2 layers are from each other or a little more for wiggle room. This would give me a better average entry price than if I entered the spread with the 7k from the beginning and limits the potential loss of the largest portion of my line. The drawback is you might only get 1 or 2 layers on before it starts to move in your direction thus limiting the profit on that pair. Layering vs. a single entry is a matter of personal preference. I tend to layer on pairs that are very correlated with a VERY high mean reversion tendency like AN - KMX or HD - LOW (stock in different companies) and RIO - RIO.pr (stock of the same company) I like to use a single entry and smaller size with stocks of 2 different companies that have wider range but have proven to be correlated over recent months but less so over the past several years like HOG - PII while using a 1:2 or better risk reward ratio.
Nice work GGSAE, You and I trade a lot alike. Nice thing about pairs is that you can trade around them like you did with CF. No set rules, no one says you have to open and close a pair at the exact same time. One thing I do try to do though is be dollar neutral at end of day in case something crazy happens the next day at the open. Congrats!
I have to dis agree with this layer or scaling in concept you folks are sharing. Personally (after 25 years in the biz) I have found that the only way you ever want to scale into any position is when your ADDING to an existing winner. NEVER NEVER NEVER add to a loser. This is fools game and will ultimately end in your demise as a trader.
It is if you add to a loser that is not part of the plan from the beginning. IMO there is no diference between putting a position on from the beginning at say 10k shares or averaging into the 10k position when you intend to risk the same amount on the trade. In fact I might even risk less since the larger portion of the trade is put on closer to where my exit door is (if the trade moves against me) The key is to have the total of all layers equal your normal position size and most important: have the DISCIPLINE TO GET OUT IF YOU ARE WRONG. To each his own I guess.
I must be missing something, most if not all of these spreads appear to be losers. What am I missing?
Here is an example: (say the pair has a 85% tendency to mean revert) Example 1 (One entry Exit): short hypothetical pair 7k shares each side at a spread price of 1.0. Stop loss exit door at 1.5 Profit target .50 Risk $3,500 Profit $3,500 Example 2 (3 Layers): Short 1k @ 1.0 Short 2k @ 1.20 Short 4k @ 1.50 Total 7k Stop loss exit door 1.80 (an additional .30 more wiggle room than example 1.) Profit target .85 (.35 less distance to travel than example 1) Risk $3,200 Profit 3,450 As you see this works well with those highly correlated pairs that tend to go back and forth over and over and allows you to be less acurate with your entry (lets face it trading is not a "perfect science") The benefit is more wiggle room and a better average price, the disadvantage is when you are right on the first layer and do not get to add the 2nd or 3rd layer then you miss out. The key to success here is discipline. You have to get out if you are wrong or else compomise the risk reward ratio of the trade.
Jonnysharp, You state that out of your first 4 completed pairs, you had 4 winners. Correct me if I am missing something. I think you had 2 winners and 2 losers with a big net loss. Short CCI 37.25 cover 36.39 Long AMT 39.98 cover 40.50 net +1.38 Short AAPL 176.89 cover 166.19 Long GOOG 491.00 cover 465.25 net -15.05 Short LOW 24.31 cover 26.71 Long HD 26.00 cover 29.33 net + .93 Short TGT 51.06 cover 55.01 Long M 19.41 cover 21.89 net -1.47 total loss -14.21 per share Why are people saying good job when it appears best to fade your signals????
Well my account is up about 1100% net YTD, with ever-increasing consistency and higher days/weeks/months...so forgive me if i ignore this advice from the guy who's claimed to have more than 5 blowups.
It is likely that these are capitally balanced positions, so he likely has 2.5 APPL to 1 GOOG, and 2.5 M to 1 TGT.