yobo, thanks for your input, I appreciate that, its always interesting to hear from another pair trader how they make their coin. There are so many different ways to pair trade, everyone can really customize their own style. If I were to trade pairs by divergence instead of mean reversion I would focus a lot on the fundamentals so that I'm long the strong, cheap stock and short the weak, expensive stock and I would probably use the ratio chart to ride the trend, maybe something for me to look at later this year. IWT2008, I don't use stops, Ive used heaps of different strategies, systems and methods over the years and have not found stops to help one bit, they are a market maker's dream and a trader's nightmare, like yobo says your a/c won't be wiped out if you keep your trade size small, that's the trick of successful trading, make heaps of small trades, for me I never have more than 20% max of my a/c exposed to any stock and I use leverage so that I can have up to 15 pairs open at any given time, that's the beauty of pair trading, I would never lever my a/c that much on directional trading, also I use pairtrade finder, a program for my entry and exit signals aswell as layer my own analysis on top of those signals, I won't take them all blindly, I like to see a few other conditions upon entry, but for exit I take the signal without hesitation. I think entry is very important because you have a choice whether to buy or sell, whereas when holding a position your more inclined to exit at an given opportunity because you need to rotate your capital from old trades into new trades with better risk/reward characteristics.
Cool. I checked out pairfind trader and it looks pretty cool. Haven't downloaded yet for a free trial, But I did sign up for their email alert service. Did you buy the software or are you just testing it out? I am going to test each one of their pairs in their daily email against my pair screener to see if we are on the same page. The instructional video makes it look like you can test verious time periods? I watch for dispersions as well as reversions. I first started out just looking for reversions but then it became pretty obvious that pairs also disperse. In fact more money can be made on the dispersion of pairs versus just reversion so why limit oneself to just one side of the pair trade. Hence the reason why I trade both directions of pairs. Curious to hear more of your thoughts about the software.
Yes by looking at some charts of different pairs you can make alot of $$$ on divergence trading the pairs instead of reversion trading them, i'm definately going to have a closer look at this style, I think the holding periods would be longer though as you would want to stay with the trend. Yeah I bought the program. The only thing I don't like about it is the portfolio management feature, its a bit lacking but I don't use it anyway. However the signals is why I bought it, Ive tried spreadsheets and all that but just found it too time consuming and messy, whereas the program automatically updates the data and gives me entry & exit signals during the day. yeah you can test those signals P&L in different time periods. works well for someone like me.
Thanks for your support yobo. One trade today, a nice divergence between the ratio chart & RSI chart drew my attention to this pair. Long POT @ 177.04 Short CF @ 146.85 Open Trades: 8
Very interesting journal to me, thanks for doing it. Have you tried any software besides Pairtrade Finder, or was that the first you tried, and you're sticking to it? It seems there is some software out there for using Ninjatrader to evaluate pairs, but I'm just starting to work with Ninjatrader. Pairtrader seems to be at a good price if it works well.
Thanks Susannah. No I haven't tried ninjatrader, i was recommended pairtrade finder to me from another pair trader. and yes so far so good, ive paper traded it and came up with good results just trying to do the same in real time now. ive tried analysing trades in excel a few years back and failed, so I looked at a few programs but settled on pairtradefinder because as you say it was pretty cheap and does the job, it comes with a guide that gave me some ideas and ive built on them and designed my own trading plan with additional analysis to the program's signals.
Hi as I am a nija user I would like to have a look at this software do you know where i can find it? Regards
I'm a pairs trader (mean reversion mostly and intraday however I do trade all time frames). I also trade the fertilzers a lot - you really need to incorporate fundamentals. Legging into a position like this with size even if you think you're spread out with layers can be disastrous! These pairs have ATRs over 10 on a regular basis, be very careful! Many pair traders have blown their accounts trading these...
GGSAE, appreciate the tip, I did notice that my CF/POT pair has the highest volatility(1.54%) out of all my open trades, and I did reduce my normal size for this trade, my trade size is 15% of my a/c value on this trade, so a 50% overnight drop in a stock would equate to a 7.5% decline in my a/c equity, I can handle that, but your right the fertilzer stocks have very high expected volatility as they could be coming to an end of a dream run over the past few years.