I was hoping to find data already calculated. I don't have the stock data (there are about 120 stocks) and, yes I could enter the SD formula, but havn't done that before. It seems simpler to just get the SD, Volatility or will Beta also be satisfactory for the purpose? wb
Any more than 200 pairs I think is too much, each pair gives roughly 10 signals per year, so 200 unique pairs gives you a possible 2000 trades per year which is plenty. So I would refine your lists by simply ranking them by correlation, just keep the top 100 or 200 correlated pairs, I prefer to have unique pairs because then you get more tradeable signals per pair, in the backtester I look for ratio charts in wide trading range before I add the pair to my watchlist. There really isn't any hard & fast rules to what type of pairs you should add, its up to the trader to find what their comfort is, for eg... some traders may be very knowledgeable of the restaurant industry and therefore may only stick to trading restaurant pairs because they know the fundamentals well, know how the stocks trade, etc......I like trading a diversified portfolio of different pairs from different industries.
Yes Ive heard of this theory aswell, the higher volatile stock producing the most returns, however my issue is that just because one stock may have a daily volatility of 3% and another stock has 2%, it doesn't mean that the move that the signal occurs on is from the higher volatile stock, the 2% stock may have moved more in the short term and produced the divergence. and if one stock has significantly different volatility to the other stock, I would say this isn't a good pair to trade as they aren't very similar, plus trading naked is way more risky as you suggest, therefore your returns become correlated to the market and you can't use as much leverage. yeah I would suggest excel spreadsheet aswell to compute volatility if you want to investigate this, I would interested in seeing the results. Yes it is a good idea to go over the winning and losing trades to try and look for a repeatable pattern, something i do with the losses, but at the end of the day a lot of it is random, the next trade result really is random, whats important is an edge over a number of trades.
Over a period of years, are pair trades more successful during periods of higher volatility, and less so during periods of lower volatility. Walt B
Hi Johnny, Have you noticed that sometimes the ratio appears to be clearly away from the average line and yet no signals are generated? Also, have you looked at all at high or low RSI as a condition when a signal is generated? Seems like some good moves come from that but often the outliers appear associated with news. I've had minor luck so far trying this but I feel like I'm just blindly following the signals without any real confirmation from what I'm seeing. You still having good luck? Thanks.
generally speaking yes, buts that's a subjective question because in periods of higher volatility the risk and reward both increase and you adjust your size accordingly, just as you increase your size in periods of low volatility, but yes higher volatile environments can present unique opportunities. so long as pairs diverge from their mean there will always be a trade to take.
To calculate the profit from the change in ratios I think this formula will work. The (% profit) = (% change in the ratios)/2 The following is from my spread sheet on recent trades: Example 1: The ratio moves up 9.3%, the profit is 4.7% Example 2: The ratio moves up 23%, the profit is 12.1% Example 3: The ratio moves up 13.2%, the profit is 6.9% Try it with some figures of your own. Walt B
Yes Ive noticed this, probably something to do with increased volatility. Yes I look at the RSI chart with each signal, i like divergences also you can tell by looking at the RSI chart whether a pair is good to trade or not, i like a chart that looks like a heartbeat graph, regular and consistent oscillations around a average. You gotta stick at it, its not about luck, rather consistent application of a method with a edge, too many traders judge their results after too little trades, treat your trading like a business, losses are business costs and wins are revenue, so long as your revenue exceeds your costs at the end of each quarter you have a profitable business.