Thanks for the comments. Since the school is being revamped, and we are only making the advanced courses available to Bright Traders (for obvious reasons), I cannot give out "everything" here, but I am always willing to help everyone in the industry. We feel that the better the industry does as a whole, the better for all of our traders and of course the Firm will continue to grow. The opening strategies have changed quite a bit, and the pairs envelopes and risk evaluation is a "fluid" thing, and will always be. I'm glad you're doing well with your firm... But, $1,000 bucks is a very fair price, and with free returnees, I feel that we do a good job. And, besides, how bad can a week in Vegas be!
Some of you are still asking for examples of how to effectively use pairs trading intraday. I will give you a simple trade from yesterday. The aol/via popped up near $5.00 (via 43+, aol 38.15 offer). So first I put in the "hard side" - tried to short sell the via at 43.00 (to no avail), so I cancelled ...and put via in again short at 43.15. This was filled in a few minutes, I was able to buy back the via at a 15 cent profit in about 4 minutes ($300), and immediately put out another short sale order up around 30 cents. I had the software keep an eye on the spread value...this time I sold the via (and it kept on going up, so I bought the aol at 38.40, thus putting on the spread for 4.90). I set a trigger for 50 cents profit, and bought the spread back at around 4.45, again making a decent profit of .45 or $900). Since I don't have the luxury of being able to trade all day, I can effectively trade this way in short "spurts" being ever conscious of pricing disparities from my real time spreadsheet which shows not only pricing but p&l and position, and I am able to see if I can "lean" on bids or offers in real time. I hope this helps...the "simple" strategies seem to look more difficult when I try to convey them in writing that when I show them as examples in school. Keep the questions coming!
Don, in situations like you just described with via/aol, after you put the second leg of the spread on, how often % wise do you hit your profit target vs. getting stopped out for loss or break-even? Also, how do you determine at what point a spread is worth consideration. I imagine this is the bulk of the proprietary process, the valuation? Could an average trader simply track the spread of two correlated stocks over time and use something like standard deviation/volatility bands to scan for good candidates ?
Let me try to "insert" a couple of responses below: Don, in situations like you just described with via/aol, after you put the second leg of the spread on, how often % wise do you hit your profit target vs. gettingstopped out for loss or break-even? >Since we don't use (or believe in) "price targets" on the individual stocks(many reasons for this, the primary reason is basic logic...take what the market will give you, only exit based on market conditions, not profit, price, percentage or time). Intead we "trade" the pair, often only using one stock, in and out...only adding the second side when the entry on the first stock is not profitable. **Now to what you probably meant by "price targets".. When we do have both sides on, we can generally add to the position every 30-50 cents, and then start reducing or closing on a scale down strategy (this comes from a bit of "intuition" derived from following the stocks day in and day out). Also, how do you determine at what point a spread is worth consideration. I imagine this is the bulk of the proprietary process, the valuation? Could an average trader simply track the spread of two correlated stocks over time and use something like standard deviation/volatility bands to scan for good candidates ? This is one of the areas where "homework" actually pays off (most "research" is usually wasted time, IMHO). Follow an intraday "price difference" (available on RediPlus) for a period of time, run a 5 year, 1 year, and 63 day review of extremes (for overall "overnight" risk purposes), and start trading either the "hard side" i.e. a short sale side, or the "momentum" side (self explanatory)...there is no substitute for OJT and experience. Does this help? (a bit tired today, a long week).
Good info, as always, Don, thanks. I figured there was a lot "discretionary" trading involved, otherwise if it was just a valuation technique then everyone would be doing it. Do you have any strategies/war stories for pairs trading when catastrophic situations hit one of the legs, like PVN or ENE recently? I suppose "get out as fast as you can" is a good strategy, on the other hand, some situations when then news is mostly bad but not "catastrophic" may result in very good pairs strategy with such a large spread. But more risk too.
Don, Thanks for your answer on pair trading. Could you please clarify how do you calculate fair value for OPG orders? What I am doing right now is to put in OPG buy or sell about 10c to 15c above or below the last print. I don't get many stocks this way, but it works if I do get them. So if the DOW is up 1%, do you put OPG on the stocks you want to buy up to 1% higher than the last print? Thanks in advance
We use a graduated fair value calculation to determine bid/offer prices on the opening. We then add a few paramters (that we include in our automated software package to those that qualify for active-x on Redi).
A lot of emphasis has been put on the "entry" of the opening trades, and that is the easy part. We spend a lot of time with exit strategies for not only openings, but all trades. I found it interesting that I gave 2 new traders the same opening program (beta test of sorts) that I was using for a couple of weeks. I monitored their success very closely (since they were about 20 feet away from me every day )...and even though we entered the trades at the same prices, these people were all over the place as far as exits went. There is, of course, no absolute right way to do it, but I was surprised to see that the same rookie mistakes are made even with this simple strategy. Some days I may have had 4 out of 5 winners, and 1 guy had all losers, and the other made money, but very little. So we spent quite a bit of time analyzing how they read the market (in almost real time, while still fresh in their heads), and were able to make some "mental modifications" and they are improving daily. So be sure to keep the basic "exit" strategies in mind, only adjust them for openings with by keeping pivots and price crosses in mind. The Specialist will usually make money, but you have to be able to read the tape well for you exit with him.
I thought I might clarify the opening indications one more time. These tentative price ranges are sent out by the NYSE to the Regional exchanges and to the traders on Redi. There are not, and cannot be, by definition "opening indications" from the NAZ, since there is no single place to go to for to see the orders.
Well, real time almost. Since several of you have asked for more details of our current pairs strategies, here goes. Yesterday I sold the aol/via spread 4 times. First at 6.98, then 7.15. then 7.44, then 7.58. This, of course means that I sold via short, and bought the aol. I was putting it on in 1000 share increments, and day trading in and out of the same side several times. To end up with 4000 long aol, 4000 shares short via.b. I actaully traded about 36,000 shares, scalping dimes or more several times. I stopped adding to the position at the 4 level (4 x order quantity), thus the 4000x4000 position. Today I started to cover, and did this: I covered the 7.58 sale with a7.19 buy. The 7.42 with a 7.15, the 6.98 with a 6.82, and the 7.15 with a 6.88. Of course the spread narrowed a lot more, currently trading at 6.10...so if I were able to focus all day on this, then I probably would have made more. The point I want to make is that you don't need to be precise in your trading strategy, you can always feel good about making profits...and with these basic risk parameters, your potential for loss is minimal. Use your basics for entry and exits, momentum, sector, FV and premium. Keep the questions coming, I like to offer what I can to help. For those who don't want their questions on the board (as it seems many of you prefer it that way)...send to me at: don@stocktrading.com