Pair Trading Environment

E

Eldredge

I have been trading pairs since October, and have been fairly pleased with the results. I have had to modify my strategy somewhat, and it seems to be working well now. My concern is that the trading environment of the last few months may be somewhat atypical. For those of you who have been trading pairs for a while, have your results in the last few months been fairly typical, or have they been better or worse than usual?

I am concerned about having a change in market conditions significantly impact my P&L. I have been profitable every month since October. Is this a good indication that I will continue to be profitable. Or, is it a good indication that I have adapted to an unusual market and will be taking a big hit soon?

PS
I posted this to the wrong thread earlier today, so I decided to start a new thread rather than change the original post. Any insights would be greatly appreciated.
 
Eldredge, I'll begin things here by asking how you do your pair strategy? I am interested as we are getting MOO support with IB later this week but I don't have a clue how to proceed though. Seems like an interesting profitable strategy, how does it work? Would appreciate any help you could offer.

Trade wisely.



10K
 
Hey Eldredge,
I also do some pairs trading and have had mixed success. Lately, it seems that other pairs traders that I have talked to have been having more difficulties than usual. Overall, even in their difficulties, they seem to be more consistent than many other traders at our firm. I think it is a great approach if you are disciplined.

Xicaju
 
xicaji,

Thanks for the response. I sit here trading by myself all day, and sometimes it's nice to be able to compare to some other traders. My concern is that I have "optimized" my methods too much for the current market. I'm glad to hear that the traders in your firm aren't finding the current market dramatically different than usual. I guess I' hang in there and make changes as necessary. Thanks again.
 
10K,

I have never done an opening order in my life, but I am thinking about trying it eventually.

As far as pair trading goes. Choose two stocks that you think should move together (based on historical movement market condition etc). When you think the difference in price is too great, short the one that is too high, and go long the one that is to short. When the pricing comes back into line, cover.

There are a lot of variations of this apparently. I actually started trading this way and developed my own techniques (I'm sure they aren't too unique) before I knew too much about it. Some traders put on one leg at a time and try to make a profit before they put the second leg on. I'm not that good at predicting direction, so I put on both legs at once. I add to the position as it goes against me (this is pretty mechanical) and cover as it comes back (this involves a little more discretion for me).

My best advice to you would be to get with a broker/firm that has .01/share commission, and start with VERY small size. As you get experience you will develop a method that is comfortable for you. I know some of the firms on this board do a lot of pair trading and teach about it. That might be a good source of info. Good luck
 
...Some traders put on one leg at a time and try to make a profit before they put the second leg on. I'm not that good at predicting direction, so I put on both legs at once.
More...

Elderedge,

If I understand your trading situation correctly (correct me if I am wrong) you are not a a prop firm. Therefore, I find the statement above that you "put on both legs at once" somewhat problematical. Since you must sell a stock on an uptick, (I assume again that you have not grabbed your own bullet or conversion so that you can short a stock at will) how then can you put your pair on "at the same time."

Perhaps you mean within seconds of getting filled on one, you then try to get filled on the other side? Or perhaps you mean that the orders are in at the same time and one or the other side may get filled first? (In which case you may have to adjust the other side)

I am not just trying to be picky here, just trying to understand your definition of "at the same time."

nitro
 
Nitro,

You're right, I put the short side on first (unless it's QQQ then it doesn't matter), then I put the long side on. Once in a while I get burnt, but not very often. This is one of the reasons I HATE the slow executions on NYSE stocks. I would rather get an instant fill so that I can finish my position than get "price improvement". Getting shorts filled on NAS is a piece of cake most of the time.
 
I have been mulling a pairs strategy for playing the open:

At the end of the day short one of the pair and go long the other.
Any moves after close or pre-open would be approximately offset - no big loss or gain regardless of market action while in a long/short pair.

In the pre-open, the market's intital direction is usually (not always) indicated. At about 9:20 or so one could close which ever position is counter-indicated by pre-open activity.

The one obvious advatnage to this idea is that if the market drops on the open, you already are in a short without having to wait (read "hope") for an uptick while chasing the stock down.


One obvious problem though, is that there are often days when the pre-market is trading up, and the stocks do indeed gap up on the open but then tank almost immediately...as, for example, ISSX, QLGC and EMLX have done several times this week.


I would be curious to hear anyone's thoughts on this idea. Especially so if someone has a possible solution to the "one obvious problem" noted above, or if anyone has tried this already....
 
Nitro,

You're right, I put the short side on first (unless it's QQQ then it doesn't matter), then I put the long side on. Once in a while I get burnt, but not very often. This is one of the reasons I HATE the slow executions on NYSE stocks. I would rather get an instant fill so that I can finish my position than get "price improvement". Getting shorts filled on NAS is a piece of cake most of the time.
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Eldredge,

OK, this makes sense.

nitro
 
Hello,
I'm new to Elite Trader, and I'm glad to have found some people interested in pairs trading. I have published a pairs trading system on the Wealth-Lab website (http://www.wealth-lab.com/), and there have been some discussions about it, but I think we can never have enough people thinking about and trying to develop better strategies and pairs trading systems .

If anyone here is really interested in further development of this system, I would be glad to meet him/her here or on the Wealth-Lab discussion forums.

I've read your posts about "real world" trading with interest, because I want to start trading soon..
 
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