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Ok let's get back to business. Here's a thought about correlation. Would like to hear others that have a statistical background. By definition correlation is a statistical measure of how two securities move in relation to each other and is based on a linear relationship. The higher the...

Can we please give this thread a rest with the finger pointing etc. Obviously, no one likes to hear about a trader at a firm take a big loss that might affect the viability of the firm and put other traders at risk. Don has clearly said this is not the case and that the firm is still in...

Nice work GGSAE, You and I trade a lot alike. Nice thing about pairs is that you can trade around them like you did with CF. No set rules, no one says you have to open and close a pair at the exact same time. One thing I do try to do though is be dollar neutral at end of day in case...

pair trading is probably the safest method to protect against a black swan event. Remember both stocks may go down, but the weaker stock should go down more. You may incrue losses but they will be less than if you didn't have a pair on. With pairs I don't like to use stops. I usually won't...

I thought you probably were. Interesting tactic. Never thought of using MOC's that way. I like the idea.

Nice work Johnny. Is it just coincidental that your trades happen to be the exact closing price of each day you sell and enter a trade?

Today is a perfect example why you want to trade pairs. Good luck to everyone! Its bloody in the streets.

In the example I gave with the SPY and the SDs you go long the SDS only because it is twice the inverse. With stocks you would stil short one and go long the other, but you are expecting a mean dispersion versus mean reversion.

Not sure I follow you but negatively correlated assets/stocks move in opposite directions versus moving together. So for example The SPY is 98% negatively correlated with the ultrashort SDS. So therefor if you wanted to hedge a long position in the SPY's you would buy in this case 50% of the...

I took a look at the the BA lmt pair and in my short term time frames of evaluating pairs I see that it has a negative correlation which brings up an interesting topic of trading pairs with negative correlations. For you all finance types out there that have studied modern portfolio...

Nice work so far Johnny on taking profits again. Any observations about the pairs you are still holding? Overall have you made money or are some of the losses you carry wiping out the gains you've captured?

Hey Joab, I agree in buying strength and selling weakness. My point was geared to when you open the trade at the end of the day. Short the stronger performer and go long the weaker. As was the case yesterday with cf/pot. CF was the weaker stock and pot acted stronger... Just to...

Here's another example. Long MOS short MON. MOS is taking it on the chin today compared to MON. MOS is down 8% versus MON down 4.48%. Pretty good odds that tomorrow the returns will reverse and MOS will outperform MON assuming MOS stays weaker than MON. No real science involved other...

My database identidies pairs when the ratio is out of whack...beyond two std. dev's. Plus I track RSI and a few other conditions. Typically, when my system identifies a pair, I'll put it on my radar and watch throughout the day and enter at end of day. Since the pair is highly correlated...

I use statistical correlation based on closing prices of the two stocks in the pair. Interesting enough, the cf/pot pair is now profitable and underscores the importance of layers.

"yobo ive done some simple testing on the forecast function and I didn't find anything of predicitive value, however as GGSAE suggests a combination of different measurements might work." THe forcast function is exactly that a forcast function based on linear regression. if you plug in the...

Just a follow up to my previous post. Current pair ratio of cf/pot is .877, the mean is .74. and two standard deviations away from the mean is .85. Also, as you noted, the correlation of the two has been trending down and the mean ratio has been trending up. Applying linear regression...

Interesting post about the correlation trend. And to further the discussion.... Quick question for anyone in the know... Excel has a forcast calculation based on linear regression. To use this function I believe one would use the current mean pair ratio as the value you want to base...

No doubt fundamentals are important. In pair trading their is no easy hard fast rules. The key to success with pairs is the same with any trade. Timing, timing, timing. Whatever criteria you use, you want to be on the right side of the trade. Personnaly, I have grown to really like...

Not sure I understand your question but with all pairs I always capital balance. Equal amounts of dollars on both sides. For me today, cf/pot is the one pair that is not working in my favor. Took some nice profits in MBT/tii, aapl/goog, and oxy/pxp. I alos trade mos but have it paired...