A study of FNM/FRE over the past year, a highly correlated pair, should be a must for anyone considering pairs trading. It highlights one of the biggest problems I have had with pairs trading. A very high success rate (90-95%) with some killer losses mixed in. I'm long a mere 100 shares of FRE at this time, but that was just good luck. Could have been many more shares as a spread of $15 seemed to favor holding FRE.
This is a great example of the pitfalls of ANY speculation. I don't care how great you think the trade is, in the market you have to work based on probabilities with no guarantees. Pairs can do weird things -- things you never thought possible. Each pair has a history, and a range, and only you know what pair may fit your personality or style. I've been trading FNMFRE for years. It requires near perfect order execution if you're a scalper. It can pay you very well, and cause you lots of pain. It's not for everyone. What's especially important is that you do your homework on each pair and decide whether your pair is business as usual or not. If it's not, than it may be best to simply not trade that pair till it calms down. Or you could specifically look to trade that pair as an anti-corrlelated one and trade only the trends. If you had done this on Monday and Today on FNMFRE you'd have done very well. But again, the risks were high -- so it may not have been right for you. Best Regards -- sslavin
What is your profit objective? FNM/FRE could give you a few percents here and there. Iâm not in a trade if I donât expect in return at least 10%. And it pays off. On 5400$ account Iâm up 16 percents for the year (including commissions - 40$/pair on datek). My average position is about 1200$.
I used to make a living doing this stuff. I have made thousands of pair trades. I cannot agree more with the poster above that said that to trade this (FRE/FNM) spread INTRA day, you have to get perfect executions. When I tried to trade it longer term, I got killed. What is funny is that today I would have a better chance at getting right, since I have the use of software for executing in tight spots. All trading has gotten tougher, but pair trading, given the returns recently, seems to be a diminishing returns business to me. nitro
I think nitro is right in claiming that pairs trading shows diminishing returns. this gaim is really tough. we started a pairs strategy on daily data with an average holding period of ten days and sixty pairs traded at any point of time in december of last year. tests would indicate a sharpe ratio of above two. so far we traded about 1.25. 03.12.02 100.00 Dez 101.98 1.98% Jän 104.08 2.06% Feb 102.14 -1.86% Mär 101.66 -0.47% Apr 102.15 0.48% Mai 103.98 1.79% Jun 105.29 1.26% we currently work on intraday pairs strategies, but we struggle to make it profitable for the period of the last six to eight months. this is a tough, tough game. peace
... where is future returns. nitro, where do you see increasing returns? which strategies do you think will outperform with the next let's say two years? peace
Overall market is in a trading range. Whenever we break out of the trading range maybe pairs trading will again be worthwhile.