Both of them are in the same industry and sector and they're large companies. But unless I'm missing something this trade isn't really going his way and he's looking to average in another position... Looking forward to seeing what happens next... A simple question... When do you decide that it's time to simply close a position because it's not working out...?
I was commenting on the pair selection only and not the efficacy of his trade per se in terms of entry. For me personally, I have two outs: the stop-loss level or the technical model no longer holding the entry bias. For me and my clients it is an either/or rule. We set both our profit targets and our stop-loss levels at the time of trade entry. For about half of the losses I take personally, the model takes me out before I hit my pre-designated stop-loss level. I agree that it would be good for the poster deucy28 to comment on your question directly, because it is certainly a reasonable one.
CVX Short / XOM Long Chart 6 Advisory for consideration to add 2nd Layer now ! http://www.elitetrader.com/vb/showthread.php?s=&postid=3763604#post3763604
For Fundamentalists and T.A. advocates: why CVX stronger than XOM http://seekingalpha.com/article/1291981-why-chevron-has-been-outperforming-exxon
Without the benefit of you reading my posts last year since August 12, 2012, in the thread Pair Trading Strategy Journal, I understand your comment (above). (reference Aug 12, 2012) http://www.elitetrader.com/vb/showthread.php?s=&postid=3596885#post3596885 The link at that post is not as good as this one: http://www.elitetrader.com/vb/showthread.php?s=&postid=3586686#post3586686 My style of pair trading, however, relishes what I have experienced in this CVX XOM trade. Additional Layers are where the bigger gains are found. I made that comment on chart 5, perhaps you missed. http://www.elitetrader.com/vb/showthread.php?s=&postid=3763098#post3763098 To understand this should be intuitively understandable, but I have my own verbose manners of description, including the provocative "standing in front of an on-coming locomotive" often when I start a trade AND being fully prepared for the "trade to open such that it goes against me as per normal for me 3/4 or so of the time." These expressions manifest my sentiment of willing to play against the momentum. But such play is done with pre-trade calculation. The following is a narrative of mine explaining the mis-ue of the term "averaging down" when describing adding Layers to a pairs trade. http://www.elitetrader.com/vb/showthread.php?s=&postid=3629724&highlight=average#post3629724 The following uses a chart describing a trade I did last year with Layers: http://www.elitetrader.com/vb/showthread.php?s=&postid=3630794&highlight=average#post3630794 I do mix the MACRO swing trade with MICRO short term trades as sub-sets of the swing trade. (An egg inside of an egg inside of an egg.) Regardless of the scalping trades, the additional Layers have sufficient merit to stand by themselves without needing to have those scalping trades in between which are just frosting on the cake. And I certainly wouldn't clutter my ET posts of the MACRO swing trade and its additional Layers with the MICRO trades in between.
BA Long / HON Short Chart 10 Last (and final) chart in the series that reviews advisories and plots of the pair. http://www.elitetrader.com/vb/showthread.php?s=&postid=3765499#post3765499
CVX Short XOM Long Chart 7 Any just installed 2nd layer (advisory a few days ago) made favorable move quickly. Link to chart is below. It now allows for the choice to close both layers, netting about break even. One can reduce the level of commitment to the trade by removing trading capital from it. Why ? See next paragraph. Aggressive traders should consider staying in the trade, but understand the relative, inherent, fundamental difference between these two companies that will be a headwind to this trade going forward. On this thread, read my Mar 21 post why CVX is probably stronger than XOM FUNDAMENTALLY, if you are into that. XOM however, may be undervalued for its potential considering it may "catch up" with its historical pay-out ratio (dividends), currently below its par. And it has raised dividends every year for three decades. If earnings go up (we are approaching earnings report season), XOM may kick in a boost to dividends, which in turn may be a boost to lift stock price. pattern. But you have to have longer patience than many pair trades last. I seldom get into this "fundamental" element, but I choose to now because CVX has been on a terror upward. The upward movement of both stocks early in the session rolled over downward with the market when the Dutch made a comment about Monday's Cypress resolution probably becoming the template for future European bank resolutions (smashing uninsured depositors with taking large per centage of their money away). If this sentiment scares Europeans (think Italy, Spain, Portugal), the mattress map appear more appealing than the bank, and depositors may be quick to pull money out of banks depending on degree of their pucker factor with the next "problem bank" or "country economy" negative headlines. Europe is our biggest trading partner, and bank runs would not be kool for either continent. Chart is at... http://www.elitetrader.com/vb/showthread.php?s=&postid=3767555#post3767555
I've been getting an influx of stock pairs traders contacting me as of late inquiring about the feasibility on switching to futures. Of course, all of them have been modeling and trading for mean reversion on one or two or three sigma moves. I guess trading is all about pain management.
CVX Short XOM Long Chart 8 Nice two days of favorable move; yesterday brought the trade to break even, and today XOM gained twice in percentage move upward in price than CVX. http://www.elitetrader.com/vb/showthread.php?s=&postid=3768277#post3768277
CVX Short XOM Long Chart 9 .......... end of chart series Level 2 ......... 64% gain annualized Level 1 ......... 13% gain annualized Chart notes the advisories and when they were posted. Chart has directional, guide lines to illustrate progress of each level to noted gains. http://www.elitetrader.com/vb/showthread.php?s=&postid=3768858#post3768858