Question to bone or the other spreaders in here. Do you find it more effective to time entries exits based off of the underlying instruments or the spread itself? I do most of my trading based off the driver of my pairs and it works but I'm always looking for other perspectives
My question is "What does the plot you illustrated represent ?" I see you are using two stocks, but I only see on plot.
What are the "drivers of my pairs" mean ? What are the drivers you are referring to ? Tech Analysis ? Amount of spread ? Any of the many software platforms out there for pairs ?
Ok cool I can elaborate. XLK is a tech sector etf...the plot represents the spread between the XLK and the SPY. I am expecting XLK to continue to outperform SPY. I do trades like this all the time...in different environments the spreads between sectors and the broader market tend to behave very differently. Divergence trading is money right now!
I trade sector Etfs and tend to spread a sector versus an index. Like XLE against SPY. If I wanted to be short the spread I would be looking for a short entry in XLE and put on the spread as a result of the signal in the underlying (xle). You tend to get in a little late this way but the move is usually a go at this point. Let me know if this makes sense!
A good solid macro sell off and everything will converge. Soon to come! Good and seperated pairs that have good corrolation will perform well in a sell off no?
IMHO, it's much more difficult to do this than to trade outright spreads. For a variety of reasons. End result is that it rarely makes sense, unless, of course, you're actually trading a vol spread. My Z$2c...
In my experience regime changes don't tend to just come on abruptly. In a low vol trending environment, correlations tend to continue to unwind and divergence rules. Only when you get a rise in correlations and vol do you get a good fading type environment. Everything looks fine for now as I haven't seen correlations tighten up. When it happens I will change my style...simple.
How do you set up for diversion. I understand convergence. Short the higher priced security and go long the cheaper one.... its just the opposite for divergence?