Pair Trading Strategy Journal

Quote from yobo:

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 clarify....

Good luck with the trade, I took profits yesterday.
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Fair enough :)

Short term for a 20 min morning bounce this may have some merit.

Best of trades to you.
 
Quote from jonnysharp:

Joab, interesting to see your on the other side of our CF/POT trade, would be pretty cool if we could both profit being on opposite trades. when are you thinking of exiting? any stops or targets in place?
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I'm 100% discretionary, I like CF to retest the 158 area BUT 145.50 is my first target.

That being said I will play it day by day hour by hour and will post my exits here when I can.
 
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 management you understand the importance of diversifying asset classes that are negatively correlated, example bonds versus stocks.

Some pairs that I like to trade with either a short or long bias are the sector spyders or the spy's and Q's matched up against their respective ultra short proshares.

For example, the today the major indexes, S&P, Dow, and Naz are getting whacked down toward the bottom of their recent channel. At the end of the day, a trade for me would be to go long the SPY, QQQQ, and the DIA and then hedge 40% of the total dollar figure with the SDS, QID, and DXD.

Anyone else trade negatively correlated pairs?
 
Quote from yobo:

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 management you understand the importance of diversifying asset classes that are negatively correlated, example bonds versus stocks.

Some pairs that I like to trade with either a short or long bias are the sector spyders or the spy's and Q's matched up against their respective ultra short proshares.

For example, the today the major indexes, S&P, Dow, and Naz are getting whacked down toward the bottom of their recent channel. At the end of the day, a trade for me would be to go long the SPY, QQQQ, and the DIA and then hedge 40% of the total dollar figure with the SDS, QID, and DXD.

Anyone else trade negatively correlated pairs?
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I am still working out positively correlated pairs so bear with me, but wouldn't you want to open and close the position in the same direction on both positions on a negatively correlated pair i.e. Stock1Long Stock2Long or Stock1Short Stock2Short in order to be properly hedged?
 
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 dollar value of the spy's...

or, $10,000 worth of spys and $5000 worth of the sds to be 100% hedged. If you wanted a long bias you might buy $10,000 worth of the SPY's and hedge with $3000 worth of the SDS.
 
Quote from yobo:

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 dollar value of the spy's...

or, $10,000 worth of spys and $5000 worth of the sds to be 100% hedged. If you wanted a long bias you might buy $10,000 worth of the SPY's and hedge with $3000 worth of the SDS.
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yup...thats what i was saying :) you would long both securities instead of going long one and shorting the other as would normally be done in a correlated pair.
 
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.
 
Yes Yobo trades are going great, open & booked profits are covering my open losses.

Got exit signals on 2 trades today, closed both at a profit.

Sold HD @ 29.33
Covered LOW @ 26.71

Sold M @ 21.89
Covered TGT @ 55.01

Wins: 4
Losses: 0

Opened 2 new trades today:

Long AKS @ 45.53
Short MT @ 69.98

Long EMR @ 46.76
Short ABB @ 24.70

Open trades: 13

Good trading to everyone.
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2052434>
 

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