Is it wise to employ a minimum market cap. on each of the legs of a pair trade? I currently have not been doing this & have attempted to mitigate this by discarding setups when beta's are too different and also by ensuring I am not short a stock with much lower market cap than the long stock. Can anyone please give input on this? Thanks
In my trading, setting minimums for market cap in pairs is purely a matter of managing takeover risk. Whereas I like to keep betas relatively similar to defend against systematic risk, I'm not sure how you see beta as an alternate safeguard to managing the market cap in your pairs. As a general rule, I always make sure to be short the smaller cap issue in a pair. However in the event of a takeover in your short positon, it is more likely that the acquiring firm is going to be another constituent of the industry (or in another industry), rather than the firm that is your long posion. Therefore, I simply dont like to be short an issue that is in the lower to mid range in its industry in terms of market cap. I keep my shorts above the 80th percentile in terms of industry market cap. Hope this helps
Yes this helps a lot. Thank you. Trying to improve on my trading, having started on 29th November my trading has been sideways, currently less than 0.1% down with commissions (1.72% realised and the rest unrealised) - 8 closed trades & 13 open but halved the size per trade somewhere in between so that I could have 20 open positions. I chose to do this because I felt this would make big hits from individual pairs hurt less but also because it offers me more diversification and whilst still rewarding good trading. Too early to say anything regarding performance on such a small number of trades I suppose. I have been using Pair Trade Finder to find my entries and then using Catalyst Corner to filter (co-integration and fundamentals) followed by my own spreadsheet charting the ratio for the past 2 years as a further discretionary filter. I would like to expand my knowledge and wondering if anyone could recommend any good books on pairs trading for both the practical and quantitative angles. I understand this question has been asked before but I wonder if these may be out of date by now in terms of what's available at the moment.
Agree, obviously Jared is a good salesman - a quick look on the askobid "refer a friend" website shows that they offer $1500 and $3000 rewards (depending on account size), with a quite big number of Jared`s follower he might have negotiated even bigger benefits .. imagine the reward only if 100 people will open accounts .. no reason to charge $500 directly for software, right? and most probably he is getting nice commission from internet VPS providers everyone practically will need for automating trades during out of market times so at first look it seems to be more a marketing event, than some real strategy .. although the concept might be viable with positive edge .. lets follow closely which results he can deliver
just to clarify, when you look at a graph of a pair to perform your analysis (quantitative backtesting, technical analysis, etc) are you looking at the ratio of the two contracts (stock price A / stock price B), or the difference of the log of the prices of the two stocks (log(stock priceA) - log(stock price B)). thanks in advance.
Just wanted to add to the thread: After forward testing about 2.5 months I am now trading live using PairTradeFinder, and I'm working only with FX not equities. I was therefore quite interested to see what Jared was planning to bring out for forex. My initial reaction was the same as voiced earlier: a really, really hard sell puts me off completely, but it should be interesting to see how his performance stacks up with time - I'm definitely passing on that Expert Advisor or whatever it was. But, my forward testing has been incredible in forex and I'm really looking for discussion partners with regards to mean reversion in that market. I completely ignore correlation, RSI and volatility, and only focus on past profitability. I run two databases, one which is very good and is currently being traded and another one which has higher volatility and lower returns but still exceeds my initial expectations. In October I had around 90% profitable trades, November was about 80%. My closed live trades in Dec have all been profitable, but there's an open drawdown so we'll see at the end of the month.