I know I said I was finished on this forum, but I just had to get this in: Bob 111, your problem is NOT pair trading. It's children. Stop picking up your kid during trading. Has he ever heard of a school bus? Taxi? Bike? Rickshaw? Here's the advice I gave all new traders when I ran a Bright office: Ditch the kids. They represent the biggest drawdown you'll ever have in your life. Join Big Brothers. At least they become someone else's problem when you are trading.
I got an e-mail from www.pairstrading.com over the weekend stating that they lounched a new pairs trading software product on their site. I subscribed today for the first time. The software gave me 33 pairs for the Russel 1000. Some of them look pretty interesting. Some are really strange. Has anyone else seen this new product? Let me know your thoughts... Al
What is the holding period for these pairs?? hours, days, weeks, months?? I have a feeling that the russell spreads have a long holding period which exposes you to a LOT of risk imo. I have traded many longer term pairs but I prefer the shorter term quick profits (quick & nimble in this market). I have also signed on for a free trial to the website and have been very unimpressed with the pairs that they have recommmended
Hi Homer, Apparently what they did was they took certain correlation and divergence parameters and calculated all the pairs for the Russell for the past 10 years. According to them, any pair has a probability of 80% to revert back to mean within 2 months. I guess if you trade all the pairs that they give you and hold them for 2 months, then you should win 80% of the time. The problem is twofold: a) you cannot trade all the pairs, and b) they don't give you exit points (profit or stop loss). So you have to do a lot of research yourself. I would not blindly trade these pairs... On the other hand, this software could be helpful as a research tool. They do give you correlated pairs and they do calculate the most highly correlated stocks with the stock of your choice. That is pretty cool. All you have to do now is some FA and TA to determine the most tradeable pair. Al
Be carefull. Any correlation between such difference stocks could be (and probably is) a fluke that will not continue in the future. secondly, where did you get that correlation measure? i show that there r-squared is .3 using prices and .05 (noise) using percent changes on the day. bloomberg screen attached.