Pair Trading Strategy Journal

Hi Deucy,

I forgot to state trade direction for my open trades (the direction refers to the left code):-

BRE/CLP 15/11/12 Short
BAX/COV 13/11/12 Short
ALGN/ZMH 13/11/12 Long
CFN/STJ 12/11/12 and then layer 2 - I didn't write down the date-ugh! Short
NLY/SNH 12/11/12 Long
AMAT/LLTC 09/11/12 Long
HPQ/DELL 09/11/12 and then layer 2 on 21/11/12 Short
ATI/SEE 01/11/12 Long
DHR/ROP 19/10/12 Long
KEY/MCO 18/10/12 Long
MRO/NBR 25/09/12 Short

Regards,
John

 

JohnP: Excellent !

1. In the history of this thread Pair Trading Strategy Jnl, many times posters recommended or asked for feedback on proposed trades. Yours is more delicate because you have made them already and some are concerning to you. I appreciate anyone who does not want to air their laundry, because we all have them and a right to our privacy. On the other hand, your attitude is very healthy, I believe, because any one observer of your trade or a consensus opinion by observers attempting to be constructive, may be helpful to you, WHICH IS THE POINT OF DOING THIS. Besides, as a newbie, you are in the honeymoon period with more latitude given to you for either less-than-good trades that may have been opened or a whole host of criticisms that any observer can give to ANY of us for our trades. I have no idea what response will be to you in terms of numbers of responses or their quality. So you are this thread's experiment....hehe. Furthermore, I suspect it could become largely subjective, the responses; i.e. don't expect there to be THE classroom solution to be served up on a platter, obvious and absolute. But it could become kool if there is one or some that particularly resonates for you. What you do from there is up to you as to whether you adopt any of the possible routes and be willing to share the outcome. A last thought on diagnosing a trade: I think it is fair criticism that this thread is not a classroom, and it could become objectionable to "clutter" it with a preponderance of posts dedicated to a trade or trades in progress, even if there is arguably reasonable value for followers of the thread, i.e. not just you but we can all learn from this style exercise. If there is interest, maybe a derivative thread can be opened for this specific purpose. Now THERE is an opening for a wanna-be thread opener. We'll just see how this plays out. It just may be a a flash-in-the pan, "We tried it, but it doesn't work out" exercise.

2. Unless there was a sizable intra-day move on the dates you initiated trade, having the date alone can be ok. But if you entered at one extreme or another in an intra-day session on your pairs, it would be advisable to share the time of entry (at least for my purpose of analysis). And thanks for understanding maybe just a few can be looked at practically. If you have favorites (among your unfavorite open trades) that you would like feedback on, send that info this way.

3. Your considerable inputs as to what influenced you to open a specific trade falls on my deaf ears because I am not wearing the software fraternity pin. The software inputs don't mean anything to me. But to the extent others find it relevant, that's great. To that end, you will find my critique probably limited. I look at these things from a CHARTS perspective, the way technical analysis is used for a TA user, but my analysis is nothing like TA. I don't use TA to examine a pair or individual stocks in a pair. Not yet. I appreciate there may be many potentially good inputs that others may use, but I don't yet. The obvious, possible, supplemental input is the software you are using. Already, I suspect many traders if not most (I don't know for sure) use combinations of resources to judge entry into a trade. My hat is off to them. I am not there yet.

4. Others are welcome to be constructive on your trades if you are ok with that, John. I would think like-minded users of your software would be in good position to understand your inputs you described. In so doing, there could be good interchange between them in sharing opinions. It's an open thread, and anyone's judgement that is negatively received may be another's significant finding.

 

Hi Deucy,

Thank you for your interesting comments.

Point 1) I am not to fussed about my trades being shown, if people want to comment or criticise them they are more than welcome. I have noticed that on this and other threads that some people do wish to keep their trading activity private and this is entirely their choice, they are not obliged to let the world know what they are trading. Ah, I better make a disclaimer that anything I say or write must not be taken as a trade recommendation, it would be far too risky!

I appreciate your comments about turning the thread into a classroom for wana be pairs traders, we clearly can't do that but I hope that anything I do post will be of help to others. I am not looking for personal on-line tutors but I am interested in how others view pairs trading.

Point 2) Because I am still working I can only gain access to the US market after I get home from work and this gives me a chance to trade in the second half of the NYSE trading day. Generally, I take trades in the latter quarter of the day and often quite close to the close. I would like you to look at a couple of my "disaster" trades for your thoughts and comments and these are shown below.

Point 3) I do apologise for presenting you with what must seem like a load of gibberish, I hadn't really appreciated that you're not making use of any software for pairs analysys.

Anyway, the fact is that we are both doing the same thing and to back-up my thoughts on a trade I also use a charting program called Share Scope to chart the two stocks of the pair. You have obviously built-up a universe of tradable pairs through sheer hard graft over the years and I take my hat off to you for your perseverance and for making it work. One big advantage of using Pair Trade Finder for example is that I can very quickly scan and find pairs from a particular Industry or group. Rightly or wrongly I have serched for pairs by getting PTF to analyse all stock holdings of various ETFs such as IYR for example. To do it manually would take me a lifetime!


So., those dodgy trades of mine....

The first is STJ/CFN, long STJ.

This one caught me out because I made the mistake of trading too close to a results day, STJ went south by 15% and my loss went north! But... I have entered a second layer and my thoughts now are that I should see some convergence because reactions to price shocks are usually overdone. Two other things that encourage me are that the 2 period RSI indicates STJ to be over sold and CFN to be overbought. I have tried to attach a chart but the system doesn't seem to let me add it even though the file type and size are OK. I will email it to you.

The second is HPQ/Dell, long HPQ.

HPQ had a price shock due to the potential accounting issue with Autonomy but my thoughts are that this is a temporary blip and an over-reaction and I think that HPQ will recover and the HPQ/DELL pair will re-converge. Hence taking out a second layer just after the price shock.

Again I can't attach the chart so I will email it to you.

I am interested in your thoughts on the above two trades.

Regards,
John

 

This should be the chart of STJ/CFN

 

Hi Deucy,

I won't post any more after this one. This is NBR/MRO and it is tormenting me a bit. I have only entered at layer 1 but may consider another trade on it if it drifts much further apart. I think I may just need a bit more time with this one.

I hope you have had a good week end.

Regards,
John

 

All viewers of this thread—especially users of PTF-- are invited to comment on John’s trade SHORT HPQ / LONG DELL..... (1) the favorability of opening it when he did, and (2) where to go from here. Make note that I did not address below the fact he has opened a second level on Nov 21.

for JohnP1000:

HPQ / DELL: At the time of your trade open, 9-11-12, it would not have qualified for a trade using my charting style based on my examination of stock plots (not using software). This alone, disqualifies me from making commentary about a currently open trade with respect to future prospects. (FYI.... I started looking at this pair from mid-2009 and found dramatic divergences in spring of 2011, followed by major declines and climbs of each stock characterized by differences too big between them in terms of steepness and percentage changes to have allowed me to trade it.) (The bowl feature on this chart would not have appealed to me, nor the more recent Decline vs Steadiness feature.)

My approach to prospective trades is to view from very long term to the here- and- now condition (including short term charts, of course). The comments I made above were sufficient to prevent me from examining short term charts.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3688424>

 

FOR CLARIFICATION, LAST POST.....

The date of JohnP1000's intial open of trade was Nov 9, 2012. I used his format of placing day before month on that post.

 

My chart starts at the beginning of CFN becoming public.... Nov 21, 2009.

Trade opened Nov 12.
CFN Short
STJ Long

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3689065>

SCENARIO:
Leading up to your trade open: A precipitous drop had occurred Oct 16 (classic head and shoulders....but Hey, I’m not a T.A. guy) and continued serious decline to Oct 18-25. Resumes precipitous decline Nov 6. You went Long Nov 12 during the precipitous decline ! DON’T DO THAT ! ...is what my personal book says ! The precipitous decline (now with you Long) continued to Nov 16. I am curious as to when you put on your second layer because the stock defined for itself something steeper in decline than its recent hx of precipitous declines when it literally went over the cliff end of day Nov 20th thru Nov 21 mid-day session when it had a dead cat bounce of small consequence mid-day.

Analysis (your first level): I believe in Life after Life, but not after when you opened the trade to where you rest now. You are far outside the window of what I do for making judgment. It is of no consolation to you that I like this pair for trading from Nov 2010 (after the new public stock settled in finally) to Oct 2012. My guess is should I have had PTF software, and it gave me suggestions to enter the trade when it did you Nov 12th, I would not have touched it. Reason is because when I see one leg in a pair experiencing drama up or down, it is nothing I would go near for conceiving of a pairs trade.

Analysis (your second level): I don’t know where you entered this one. My guess it opened during the continued precipitous decline between your first level entry Nov 12 and Nov 20th before the one day over- the- cliff experience starting at the end of the day Nov 20th which would put this second level in Hades, too. If you started the second level in this Nov 16 – 20 window I would have said to you before opening the second level, you are not pair trading within my paremeters, and I would not open a second level for myself within the context of my normal style. I would have said to you, “Your are becoming a different style trader, not a pairs trader of my style because I don’t exist in stock plots of this circumstance.” (I would probably have either closed the pair trade or closed the Short CFN and play the STJ Long recovery to some extent. But this surmisal goes beyond my venue to speak from.)

 

Hi Deucy,

It looks like it may just be the two of us on this thread at the moment.

Thank you for your response to my HPQ/Dell trade.

I see your point about the trade not fitting your comfort zone and I must say that had I have looked at it in chart form over several years I may also have skipped it. Up until now I have only really been looking back a year or so believing that the recent history is statistically more relevant.

It looks like re-convergence may be starting with the HPQ/Dell trade, we shall see.

The software I am using shows the ratio between the two stock prices and it is the chart that users of this software tend to look at to get a feel for the behavior of the pair. One drawback is that the ratio chart will only show a maximum look-back of one year. So using the software alone I don't see things like the 7 year bowl and I don't really get much of an impression of the decline v steadiness.

I shall try to attach a screen shot of what I look at when a trade is signaled by PTF. There is only one trade signal today, IJJ/PHO, long IJJ but these are two ETFs and I am not sure about them. Looking back over several years using Share Scope, they are highly correlated and reasonably co-integrated so they would probably be OK but the ratio chart is trending too much for my liking.

I closed BRE/CLP today for a small profit, not that much really but it is better than a loss. So far, all closed trades have closed in profit.

 

Hi Deucy,

I have only just picked up on your comments about CFN/STJ.

I note your point on the very sharp decline, I guess this could lead to further decline, momentum, which it did! And as you say it looks like a H&S. Your rule of staying clear if one leg has done something dramatic would seem to be a good one. Reasonable price action on both sides prior to taking a trade makes a lot of sense.

I placed the second trade on the 21st Nov at 31.02 (STJ) which on reflection was a bit of a gamble. My rationale was that STJ is now very over sold whereas CFN is quite overbought so I am expecting some re-convergence - I may have to wait some time though in which case I may cut my losses on this one or as you suggest, play the STJ recovery, assuming it does!

Well, I guess it's all part of my learning experience.

Thank you very much for your thoughts, observations and suggestions, they are greatly appreciated.

I shall study the next PTF signal with much more care and due diligence, I could do without these stressful pairs.

Regards,
John