Very interesting. A few pertinent points from Kaufman; 1) He advocates a raw stochastic as the entry indicator, as there is less lag than RSI or MACD. The long form formula (don't want to mess with subscripts) is Stochastic = (Today's close - min last n days) / (max last n days - min last n days) He tests look back periods (the n days) up to 20 days, so fairly short term. 2) Entry based on stochastic difference. He tests +/- 40 to +/- 60 3) for adjusting position size he advocates using Average True Range as the measure of volatility. His logic is it factors in highs and lows of the day, as opposed to just the closing price. For someone like me who desperately wants to get away from the screen, I'm not sure how good that would be. What I like so far is he takes you on a journey of exploration, rather than saying this is how to do it. At the end you have clear ideas of what should be factored in, how to do so and test / measure the results. In other words he gives you the tools to design your own system to suit your needs. Perfect for me, because I can't stand that How to Make a Million Bucks in 5 Minutes a Day garbage.
Thank you caveman. I read it. The theme is to take ALL market direction influence out of the pair. Why ? Because the trader has already identified either by technical analysis or fundamental analysis that that either the Long is undervalued or the short is overvalued or (happily) both is the case. Since I don't do technical nor fundamental analysis, it does not apply to my trading. BUT, I agree with you, it is a fascinating article and gives the tools to allow one to zero out market direction influence that may unduly apply to one leg more than another because of their respective betas. There certainly will be occurrences that will become obvious that one leg can have a strongly supported analysis suggesting going long or short. That alone could constitute a trade. But a pair with great credentials to go different ways (one long and the other short) is perfect for applying the tools from this article. It is a good trick to put in the bag to be used when the opportunity presents. Good find ! Thanks !
As promised from you, good snippet derivative from Kaufman. You found the essence of the article. Nicely condensed report, justrading ! Have you used the SEARCH engine of ET ? You might find others who know Kaufman.
I have just looked at my positions 90 minutes from session closing. short HON long BA has slipped and laying flat, not moving for hours with unbooked minor loss. short CI long AET has ripped against me today. It is 2/3 of the distance to me placing another layer on. I may keep a closer eye on it to add that layer should it reach that threshold of doing so. NOTE: It is unusual to have my positions positive early in a pair trade because I frequently open into momentum that is in the opposite direction I desire. Should the rubber band stretch way long against me from the opening of a trade, I typically put on another layer. If the first layer was good to establish, by its very nature the second layer is that much better.
curious.... can someone break this down for me.... whats the amount actually used for this trade? <a target='_blank' title='ImageShack - Image And Video Hosting' href='http://imageshack.us/photo/my-images/402/pairs.png/'><img src='http://img402.imageshack.us/img402/1658/pairs.png' border='0'/></a><br>Uploaded with <a target='_blank' href='http://imageshack.us'>ImageShack.us</a>
REFERENCE THREE POSTS UP: CI Short AET Long 2nd Layer today Pictured is a screen shot from my trading platform and my trading log. <img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3624140> It is too late to screen shot my first layer from my trading platform; trades performed evaporate from it after midnight. But I can screen print my trading log should you wish. I suppose I could log on to my broker's web site and take a screen shot of documentation there. Lots of work editing though.
Be advised HOT HST is soaring. I closed my trade two weeks ago, doing nicely in it. But it moved good yesterday and today, and my trade would have accrued another 25% of gain. I first identified this chart on Aug 1 and heralded it as one of the best if not the best I have seen in 4 years.
Please see chart posted at TRADING forum / Charts of Note WHERE ARE THEY NOW ? 6 Weeks Later HOT short / HST long http://www.elitetrader.com/vb/showthread.php?s=&postid=3625353#post3625353