Ok folks. Updated chart on nicely and quickly performing trade (re-trade, actually) Short HOT Long HST all over again. It had mostly retraced (80%) from the closing out of the Aug trade's starting point of that trade three weeks earlier which of course is why I called to start accumulating shares a few days ago (posted twice to accumulate). The train has left the station in the last few days, making a nice move almost overnight. In the big scheme of things, it has a lot more to go, but why I got out flat by 22 August was that it appeared to be rolling over, which it did, moving toward the point of origin of the original trade. Many times, wonderfully looking potential trades for long distance moves in a trader's favor do these "re-visits" before finishing the long trip to the final, excellent destination. Chart posted on top of page for Forums: Trading / Charts of Note or if link works: http://www.elitetrader.com/vb/editpost.php?s=&action=editpost&postid=3619574
So what he is preaching is what I self taught myself from the experience I had which he describes. Note he says "...even though a series of small losses could total the same as one large loss" [from a long term trade]" (1) Be advised, my quantity of losses booked as a loss is less than 10% of my total trades. This is for two reasons: (1) It is inherent in pairs trading that losses are just going to be fewer because you should be getting only into good trades which you recognize them immediately by chart plots before entering the trade. They don't lie: The pair is either unusually spread or it is not ! (2) I pass up countless good looking trades that appear just as I described them to be, unusually large spreads and high probability of reversion to the mean. Why do I pass on so many good looking plots ? Because I don't want a 30% loss rate or even only a 20% loss rate. I want much better than that. As preposterous as it sounds, I look at a pair's plot as far back as 20 years, then 10 years, then 5 years, then 1 year, then 6 months, then 3 months, then shorter of course. I want the insurance of knowing that if a trade continues to go against me, it will come back; and it had better, because I will be adding layers to the original trade. I have to know its safe ! If the original trade was safe, then the additional layers are safer yet because they represent better entries than the original layer. (2) He refers to many shorter trades (than a few long ones). He could have been more clear. I don't know if he is referring to the same securities he trades repeatedly. Ideally, I want to be in 20 simultaneous trades of different stocks with small units of investment rather than 10 with larger units. More opportunities to get hits with extra bases. A trade that will become a loss will not influence me to deviate from my discipline in the trade because it represents a small proportion of my trading capital, and emotions won't get in the way. I trade better this way, reminding myself of the probability being in my favor and to have no reservations for adding layers (after double checking my original work done prior to entering the original trade.)
Very interesting. I will post snippets from the book as and when I come across anything interesting. I like your idea of spreading risk so that no single trade is very significant. I'm looking for steady returns without being glued to the screen. And no I don't consider the many hours crunching numbers and planning as being glued to the screen, it's sitting there waiting for something to happen that I see as a waste.
Thanks for kicking off this thread again. I've been trading F against GM several times this year. It hasn't been easy since GM has a higher beta and has outperformed as the markets churn higher. How often do you remove your hedge and take a directional bet? For example, with a 7%+ move in GM over the past two days, it's tempting to just sell the long F position and keep the short GM in play. Also, after a market correction, it seems advantageous to unwind the short positions when other indicators (sentiment, valuations) suggest going long. Thoughts? -lf
Incredible question. Incredible because I have not seen the subject addressed before. But I admit, I have read maybe only 2/3 of this thread. Incredible question because I think about it all the time: removing one leg of the hedge. The reason why the subject haunts me is because I am a veteran day trader. Look at the last chart I posted; it is on the TRADING forum and the CHARTS of NOTE thread. Notice the rocketing upward of the hedged pair at one point. The old me would have removed the short leg before a third of that movement would have occurred. That is "momentum" day trading. In other circumstances, compelling reason/s could drive one who is not a day trader to remove one leg of the hedge, and I suspect that is what you are referring to. The only reason I don't do that presently is because of discipline. It was discipline that when I was day trading didn't allow me to trade any other way. In pairs trading, I am a neophyte when you consider the modest number of trades I have put on relative to the four years since I started. (But my style of pairs trading emphasizes quality, not quantity of trades.) My point is that I am still in the exploration stage of pairs trading attempting to examine how successful it can be for me. I don't wish to dilute my attention to other trading opportunities. I have PLANS that are bigger than me as relate to the future of pairs trading. I want to keep my focus. (The PLANS would allow both only the finest quality of trades to be put on in a manner that would allow ALL trading capital to be applied at the same time.) Now, lets address your question on the prospect of it being a meritorious approach to the market. I absolutely believe for a more holistic trader, it is a fantastic manner by which to trade. First, it would be great for one who is talented in more than pairs trading. Secondly, I recognize there could be different styles by which a pairs trader can incorporate that chosen second style to pairs trading. There could be varying intensities by which that second style could be applied to an otherwise core of trading of pairs. It could purely be an opportunistic and peripheral second style to pairs trading, or it could be a trader who implements both styles being in equal weight to the manner by which he wants to trade. In the end, he should be very good at using both and remain disciplined and practiced to the implementation of both styles as if together it is his ONE style of trading, i.e. using both modalities to define his overall trading style. He should pay attention to the care and feeding of both as if either one was the most important to him. Have you ever seen the novelty of a guy sitting on stage simultaneously playing multiple, musical instruments ? A trader could orchestrate a pairs trading style with another he is excellent at and be good enough to sell tickets to observers.
New chart posted for prospective pair trade for myself. See forum TRADING thread Charts of Note http://www.elitetrader.com/vb/editpost.php?s=&action=editpost&postid=3621503
New chart posted Sunday night for prospective pair trade for myself. See forum TRADING thread Charts of Note http://www.elitetrader.com/vb/showthread.php?s=&postid=3621503#post3621503
The last two posts are mine, published last night. short HON long BA short CI long AET The charts are at the forum TRADING and at the thread Charts of Note. http://www.elitetrader.com/vb/showthread.php?s=&threadid=237628&perpage=10&pagenumber=39 HON BA trade: I entered it with a full level one position (a normal share lot for an opening for me). The session opening gave a BIG gift, thank you VERY much ! BA gapped down at the open, making the spread bigger than the close of Friday session. I entered HON BA 2 hrs and 10 min after session open and remained open at end of session today. CI AET trade. On the Charts of Note thread last night I commented it may be prudent to leg in to this one due to the recent narrowing of the spread late last week. (It would have been better to get into this last week, it appeared.) But as the session wore on today, the spread retraced to mid-week similar to mid-week last week and allowed for an entry as good as there could possibly last week. Joy ! I entered CI AET 2 hrs and 15 min after session open and remained open at end of session today. In the aggregate, within the first half hour of opening these, I enjoyed the appearance of gains; at the close of the session I experienced an equal amount of loss in the position. Both pairs appear they could be a normal time of holding.... one to two weeks. CI AET may be eligible for adding a second layer at some time in the future. For HON BA, there is kissy kissy sentiment for HON (my short) and neutral sentiment for BA. I don't trade on that, and I don't trade on fundamentals. I use no software and ignore the standard metrics applicable for pair trading. Purely chart movement. This has worked consistently well over the years for me. I DO anticipate becoming working with those metrics in months to come, slowly bringing them on to determine how much wheaties can be added to my results. The following is a narrative of my style. It explains me. Inside that context, I am appealing for comments on pairs I post and trades I nurture. There is much to be critical of (good and bad). It is not intended to be a full fledged journal. I cannot post that frequently now. But when I do, I would like constructive feedback or opinions. The timing with which I get in to a trade does not have to be done with any preciseness as in technical analysis which I virtually do not use either. I am a position, swing trader and judge entries and exits by the day more than I do by the hour or minute. I acknowledge and applaud the success others have expressed years ago on this thread using all the tools I don't. I have not read all the posts. I did come away with a sense that Johnny's (thread originator) and others are short term or very short term in their positions. That may have influenced me to ignore some of the metrics and software being used, because I was not interested in short term. Next comes the question what is short term ? Probably it is in the eyes of the beholder. I am a bit of a hybrid. I like to see my positions mature into at least half their potential, but I sometime scalp them along the way. I watched early on the rolling nature of many pairs, and it sparked the old 1990's day trader in me. So I traditionally in my trading do that, too. If one is not considered a "trader" wherein "wash sales" are not an issue, this scalping can be lucrative, but just a subset of the bigger, macro picture of what is expected in the trading of a pair of mine. A defining characteristic of my trades is SECURITY. For crying out loud, I look at some half dozen or more chart terms (daily, weekly, monthly, yearly time periods) attempting to ferret out the liability of a trade I'm contemplating. I don't argue with the notion that only the short term (perhaps under 6 months) is important for a trade. But I put on the extra measure of safety, looking top down at a pairs' spread history starting 15 or 20 years into the past. It gives me a degree of comfort to know that a trade that does not go good for me will eventually come back (high probability). No one wants to suffer lost opportunity costs holding on to dead money in a trade. That is why each trade is a small part of my trading capital. But you argue: "It is all relative." I agree. I mitigate a trade that is experiencing an unbooked loss by first scalping when I can as the trade matures. These scalps frequently occur from layers added to the original trade. Secondly, long term unbooked trades eventually revert to the mean or at least to a point where the cumulative, profitable scalps neutralize the eventual and final booked loss of the first layer. A comment here about going forward. My traditional style will be truncated as I pay less attention to progress in a trade as I used to. I have some life issues to deal with just now. But I will do my best anyway, knowing I will miss many of what were traditionally deemed as opportunities. Do I ever pull the ejection handle earlier ? I am always second guessing myself. Did the pair really warrant being put on as a trade ? Infrequently, but I HAVE concluded that I "did the wrong thing." Due to the length of time in the trade and the opportunities that have presented itself to scalp, I may or may not punch out early (for me). This is not a good time in my life due to other projects that were forced on me to be meticulously journaling. Rather, I would like to post some charts I am interested in. I will make occasional notes as a trade is in progress, but nothing frequent. I will also make comments about charts I had already closed a trade out of: I like tracking them well beyond the closing of the trade. How much did they mature past my closing into what would have been that much more rich of a trade ? They were good trades once; they sometimes retrace to the origin of the first trade that was successful. The trades above, HON and BA along with CI and AET were old, good trades and have come back for use again. At a minimum, maybe we can revive what was a wonderful thread for years. In that case, it won't be about me; maybe I just became a catalyst.
Deucy.. you have to read this its awsome! https://www.tradestation.com/en/education/labs/analysis-concepts/market-neutral-pairs-trading