Pair Trading Strategy Journal

1. Thank you bwolinsky for making what appears to be intention for constructive criticism. Your generosity in devoting the amount of verbiage to my post makes me grateful. Such feedback is welcome. The best I can do is do you the courtesy of acknowledgment. There are disconnects between what you say and what reality is, which I speculatively fault only your lack of benefit in knowing me and my motivations, not your good intentions.

2. Your first statement uses the phrase “....does not mean readers should listen to you.”
A. You are referencing my post you quoted. My post was a response to another issuing to me concern about my liabilities for issuing advisories. I carefully crafted it to make sure my liabilities are to be understood equal to the value of my advice. They are opinions, and you know how opinions are as much in quantity in the world as there are people’s physiological back side. Everyone has them.
B. Your use of the word “should” presumes something that in reality does not exist. I would never prevail on others in a manner that I believe they “should” listen to me. I post for educational and entertainment purposes, and it is to those that find such virtue in my posts that I make my posts available to.

3. Your second statement is an equally large presumption of me when you state my mind has a notion about others, “... you should follow me.” See 2B above that responds appropriately.

4. Your 3rd paragraph nails thinking exactly as mine in the first part. (I break it into parts because the entire paragraph is a world-class run-on sentence.)
A. Your use of “amusement” would be my use: I post to amuse, and I do it in the context of education as I cited earlier. Specifically, an observer of my posts arguably would be amused as he sees someone who is doing something in style off-beat from conventional pair traders, but may learn something from it. What is that ? I have posted on my style a few times in this thread. Without the benefit of knowing me by these past posts, you don’t have the benefit of understanding the greater cause as to why I post advisories.
B. Your phrase, “...nobody should take action with any of your recommendations..." includes that powerful word, “should.” Reference 2B, again.

5. Staying on your 3rd paragraph through your last one: Your verbiage refers to conventional pair trading modalities. Why ? I attribute it to you not having the benefit of knowing my unconventional style as laid out in various posts on this thread. Maybe there is room for mind expanding beyond conventional ?

6. Not withstanding the attitude I expressed about my desire for advancing amusement and education, the feedback I get by the level of downloads of my many charts point to popularity. Why ? Maybe for amusement and education. Coincidentally, since my first charts posted in early August last year 2012, I don’t recall a losing trade or advisory. Forgive me if I overlooked one, but I don’t recall any. I post a number of charts justifying an advisory and then a number in plot following after the advisory. It is not extraordinary that 180 to well over 200 are downloaded, and I think I have seen a 300 print. I’m only speculating, because no one knew me or my charts in August or September of last year, and the download numbers then were only respectable. But the recent (last few months) have had those early charts downloading increase a lot, even though they are a half year in the past. One explanation is this track record is making traders go back to researching my style, including the earliest charts. Why ? Maybe to gleen the same theme that runs through all of them and to establish credibility of my style through its consistency of results.
 
Quote from bwolinsky:
.... fundamentally XOM is better than CVX, but the levels aren't really good for XOM so it's better just to short CVX...
More...

bwolinsky ......... You're batting .333. Not too bad in baseball, but in this game ya gotta hit over .500.
Your 3 quotes follow:

(1)
".... fundamentally XOM is better than CVX..."
Here is one dude that says you're wrong. There is probably a reason he is published more than you (or me, for that matter).
http://seekingalpha.com/article/1291981-why-chevron-has-been-outperforming-exxon

(2)
"...but the levels aren't really good for XOM..."
For MY STYLE of pair trading purpose, XOM is not good for me either.....IT'S GREAT !
http://www.elitetrader.com/vb/showthread.php?s=&postid=3768858#post3768858

(3)
"...short CVX...."
Ya hit for extra bases today. I have been shorting CVX all along.
http://www.elitetrader.com/vb/showthread.php?s=&postid=3769458#post3769458
 
Quote from deucy28:

CVX Short
XOM Long

Chart 9 .......... end of chart series

Level 2 ......... 64% gain annualized
Level 1 ......... 13% gain annualized

Chart has advisories when posted on ET.
Chart has directional, guide lines to illustrate progress of each level to noted gains.

http://www.elitetrader.com/vb/showthread.php?postid=3768858#post3768858
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CVX Short
XOM Long

Postscript: The beat goes on (very favorably) whether still in the trade or not.

http://www.elitetrader.com/vb/showthread.php?s=&postid=3769458#post3769458
 
Quote from deucy28:

CVX Short
XOM Long

This chart shows the quality of trade advisories, chiefly the inception of the trade and adding layer 2 to it.

http://www.elitetrader.com/vb/showthread.php?s=&postid=3774761#post3774761
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Pairs trades are single entries.

It is your layer that adds unreasonable profitability to your pairs trades.

Short CVX at Max position size with layers of both on from the beginning would have made you more money on this trade, which was what I had said from the start with this.
 
Quote from bwolinsky:

Pairs trades are single entries.

It is your layer that adds unreasonable profitability to your pairs trades.

Short CVX at Max position size with layers of both on from the beginning would have made you more money on this trade, which was what I had said from the start with this.
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The following is what our discussion refers to....

http://www.elitetrader.com/vb/showthread.php?s=&postid=3774761#post3774761


I had a hard time decyphering your post, but finally think I understand it by back engineering it to your previous Mar 27th post where you recommended then just shorting CVX rather than pair trade with XOM. In your current post you are stating a greater gain would have been had should I have taken all capital invested into the trade (including 2nd layer money) and allocated it all to a naked short of CVX rather than adding an XOM long to it.

My response to that .....

(1) A trader doing what you recommended would have been required to be highly confident of a directional trade by taking everything I eventually had allocated that included four legs consisting of two longs (XOM) and two shorts (CVX) and applying it "from the beginning" [of the trade] as you stated. That would have been a sizable position in one direction. Maybe an arrogant position ? It would have required sitting with a very large position through 11 days (Mar 14 - 25) including a serious move against the trader .

or......more likely for an excellent trader (I presume) like yourself....

(2) the trader being only short CVX would have reaped a decent unbooked gain from the start date of my trade for 5 days (to Mar 19). We don't know, though, when a good trader would have booked the gain. If before the 5th day, maybe not so wonderful of a gain. After the 5th day, the unfavorable spike upward of a shorted CVX on the 6th day of the trade would have dramatically reduced any unbooked gain had the trader bailed on that day, or eliminated it altogether because the end of the 6th day would have seen CVX price higher than the start of the trade, which is not healthy for holding naked shorts.

(3) Had the trader at the end of the 6th day not have closed by then, he would be holding a now unbooked loss growing and continuing to be hammered with more unfavorable movement of the stock to Mar 25 which is 11 days after the start of the trade before the hemorrhaging would finally cease-- which seems highly unlikely for traders even with a very wide stop-- and would have been stopped out with anything ranging from a bad to a nasty loss.


Looking with hindsight of the stock plot of CVX shows a perfect example of how one must have excellent timing and consistently so. Perhaps many years of practice also ? Perhaps years of "paying one's dues" during those years of practice ? Personally, I would rather pay a high price for a good crystal ball. ..... or..... better yet, pair trade !


Pair trading all but eliminates the serious disadvantages just cited. The trade off is to enjoy more modest, less sexy returns, but with much higher rates of booked gains to overall trades put on. The use of the phrase "much higher" could be replaced with just "higher" for what I perceive to be the case with pair trading generally. In my style of pair trading, "much higher" is more accurate because of the priority I put on SAFETY to the selection of my pairs. Furthermore, the innate characteristic of pair trading is a hedged trade, if you will. I can only speak for myself, but this mitigating of frequent, exogenous events in the stock market, or the less frequent black swan disasters, allow my vital signs to remain within normal limits at all times.

Unlike your earlier post of Mar 27th, "...so it's better just to short CVX..." I am not as presumptuous to state what is better for another trader, but prefer to recognize there are different strokes for different traders for legitimately different reasons.

Trade well and prosper !
 
Here is a swat at trading a pair in different industries. Note the very important Point #6 below explaining the seriousness of this trade.

AET Short ...... Insurance company with 3 million shares / day traded.
R Long ....... Rental trucking company with 1/2 million shares / day traded.

Two posts (Chart 1 and Chart 2, respectively)
http://www.elitetrader.com/vb/showthread.php?s=&postid=3784777#post3784777

The approach is to accumulate very small lots of shares over time (multiple layers) as position moves unfavorably, and be willing to hold for very many months as needed.

Trade (including mulitiple layers) can close much earlier should a significantly favorable move in position occur.

Points:
1. This pair was selectively chosen for correlation. Caveats: It currently is not at an optimal spread between the Short and Long legs relative to the multiple months (even years) of history I typically demand for pairs. Very long history which I put less weight on for significance, nevertheless includes times of even significantly wider spreads which points to a small possibility of an aggregate, negative return.
2. Whether very long term hold or relatively short term hold, the expectation is for a gain meaningfully net of commissions and shrinkage.
3. An accumulation over time of shares in a long term hold scenario has expectation that in absolute terms, a sizable gain will be had but potentially with a humbled, annualized return (accounting for time in a trade) that an otherwise average pair trader typically enjoys.
4. "Trading of layers" (opening and closing them) over time would be a possibility, but constraints on this trader's time currently will probably not allow this. Historically, though, trading of layers has been overall gratifying.
5. By "being in the trade" this is an acid test to take the experiment seriously and to maintain the discipline over time it legitimately deserves.
6. The measure of success in this trade can point to the viability of--or lack thereof--trading pairs with stocks of disparate sectors and/or industries comprising the Long and Short components of a pair. Only a series of such trades can allow for some statistically meaningful conclusion. The value of such enterprise is to determine if the population of tradable pairs can and should be expanded when carefully selected.... at least to the extent of this trader's style of pair trading, capability for selection, and extent of trading talent.

Two posts (Chart 1 and Chart 2, respectively)
http://www.elitetrader.com/vb/showthread.php?s=&postid=3784777#post3784777
 
Quote from deucy28:

Here is a swat at trading a pair in different industries. Note the very important Point #6 below explaining the seriousness of this trade.

AET Short ...... Insurance company with 3 million shares / day traded.
R Long ....... Rental trucking company with 1/2 million shares / day traded.

Two posts (Chart 1 and Chart 2, respectively)
http://www.elitetrader.com/vb/showthread.php?s=&postid=3784777#post3784777

The approach is to accumulate very small lots of shares over time (multiple layers) as position moves unfavorably, and be willing to hold for very many months as needed.

Trade (including mulitiple layers) can close much earlier should a significantly favorable move in position occur.

Points:
1. This pair was selectively chosen for correlation. Caveats: It currently is not at an optimal spread between the Short and Long legs relative to the multiple months (even years) of history I typically demand for pairs. Very long history which I put less weight on for significance, nevertheless includes times of even significantly wider spreads which points to a small possibility of an aggregate, negative return.
2. Whether very long term hold or relatively short term hold, the expectation is for a gain meaningfully net of commissions and shrinkage.
3. An accumulation over time of shares in a long term hold scenario has expectation that in absolute terms, a sizable gain will be had but potentially with a humbled, annualized return (accounting for time in a trade) that an otherwise average pair trader typically enjoys.
4. "Trading of layers" (opening and closing them) over time would be a possibility, but constraints on this trader's time currently will probably not allow this. Historically, though, trading of layers has been overall gratifying.
5. By "being in the trade" this is an acid test to take the experiment seriously and to maintain the discipline over time it legitimately deserves.
6. The measure of success in this trade can point to the viability of--or lack thereof--trading pairs with stocks of disparate sectors and/or industries comprising the Long and Short components of a pair. Only a series of such trades can allow for some statistically meaningful conclusion. The value of such enterprise is to determine if the population of tradable pairs can and should be expanded when carefully selected.... at least to the extent of this trader's style of pair trading, capability for selection, and extent of trading talent.

Two posts (Chart 1 and Chart 2, respectively)
http://www.elitetrader.com/vb/showthread.php?s=&postid=3784777#post3784777
More...

I have been on and off this thread. I like the safety of pairs trading in exchange for lower returns. Are you scanning for these pairs manually?
 
Quote from koolaid:

I have been on and off this thread. I like the safety of pairs trading in exchange for lower returns. Are you scanning for these pairs manually?
More...

Thanks for the question.

Answer....PART I
(1) Yes
(2) There is a small group of us that trade my style, which places relative SAFETY over anything else, and we share nominations for consideration to trade. This cuts down the time enormously from what it would take individually to find excellent trades. However, we each try to put the time in anyway in order to select from the best nominated to be our own trades.
(3) If one wanted to go his own way, he can readily find tradable pairs that fit my style of pair trading. For the most part, they are not ready to trade that moment, but go on one's personal watch list. By having a BIG watch list, something is ready or about to be ready to trade. Definitely some research time involved.
(4) There are resources on the internet to tap. Unfortunately, many pairs that may be found there are geared for conventional pair trading and don't fit my mold. Repeat (3) above.

Answer....PART II
(1) BAD NEWS: As a group, we are not geared presently to take on many numbers of "interested" who want to learn my style. With individual group members, it is a hit or miss proposition whether it is convenient to start someone. Patience here is required.
(2) GOOD NEWS: I have posted on ET (my charts on Charts of Note) since early Aug 2012 and on this thread with verbiage since early Aug 2012. By going back and scanning those posts, it will be very simple to understand the simplicity of style I refer to.
(3) MORE GOOD NEWS: This one requires patience. A movement is afoot to reverse our limitation cited in (1). We don't expect it to be in place until fall.

Interested traders are welcome to make further inquiry by PM or email (I make my email address available; just click my name.) I highly encourage, though, the scanning through past posts because I generally don't repeat what is already there, but refer to those threads. Regardless, experience has shown us there are plenty of personal questions with answers that may not have been posted or just need more emphasis from us to respond with.
 
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