Nuts and Bolts of Pairs

Originally posted by Don Bright
The secret to making money with a good pairs strategy is to not get too bogged down in the math and the correlation. Use the basic "price difference" function available on Redi and other software, check back 3 years and also 3 months. The intraday trading of the pairs is where the money is....not buying and holding the pairs at differing price intervals.

Many times you will never even do both sides, just buy the stonger "leaning on the weaker"......

It takes a few hours in class to get the concepts out...but I thought a little help here would be ok.

Don
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Hehe, Don speaks up and everyone gets excited. :D So you're basically saying to keep it simple and stick to the intraday time frame?

I take it the more correlated things are, the better - one could make the argument that less correlated stocks would provide more risk and potential reward, but I'm guessing that argument is probably bullshit?

How does one deal with varying betas and varying prices?

Thanks,
-bung
 
Originally posted by bungrider


Hehe, Don speaks up and everyone gets excited. :D So you're basically saying to keep it simple and stick to the intraday time frame?

I take it the more correlated things are, the better - one could make the argument that less correlated stocks would provide more risk and potential reward, but I'm guessing that argument is probably bullshit?

How does one deal with varying betas and varying prices?

Thanks,
-bung
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We deal with varying betas and prices by weighting the share amount ratio a bit....1200 x 800 shares, etc.

Don
 
don (0r anyone else), could you expand on the concept of only taking one side of the pair -(take the stronger leaning on the weaker) ? if you have a pair, say COFKRB and it spikes up, you are supposed to short COF and go long KRB. what if right when you are going to put the pair on and you have the COF short, you notice a huge short seller in KRB showing 80,000 on the offer with the next level 10 cents down (When you are trying to get long). I know it would make sense to wait on the KRB long and try to get a better price- but is a better move to just keep the COF short and not even enter KRB? or is it important to get the pair on all at once and let the spread take care of itself regardless if you see impending doom for your long side? thanks.
 
Originally posted by NDQnCA
don (0r anyone else), could you expand on the concept of only taking one side of the pair -(take the stronger leaning on the weaker) ? if you have a pair, say COFKRB and it spikes up, you are supposed to short COF and go long KRB. what if right when you are going to put the pair on and you have the COF short, you notice a huge short seller in KRB showing 80,000 on the offer with the next level 10 cents down (When you are trying to get long). I know it would make sense to wait on the KRB long and try to get a better price- but is a better move to just keep the COF short and not even enter KRB? or is it important to get the pair on all at once and let the spread take care of itself regardless if you see impending doom for your long side? thanks.
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Since we enter only one side at a time, we have the choice of making a profit based on momentum, relative strength, or any combination of factors on that one stock.....but if the stock behaves badly, then we simply enter the other stock, thus making for a completed pair.

We may trade in and out of one side 20 -40 times in a day, and only do both sides 4 or 5 times.....

There is a little more to it, but this is the "nuts and bolts"...

Don
 
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