Pair Trading Strategy Journal

Talking about consolidation and overnight price shock...in addition to all the P's, PE, PB, PCF....wouldn't the size of market cap be as important, if not more important than anything else to consider?

Being short a small cap like CF against a larger cap like MOS or POT overnight could lead to disaster.
I believe mkt cap is a big factor when considering a L/S bias.
 
Yeah maybe my CF/POT trade isn't so good in terms of risk/reward, interesting stuff abt mkt cap for bias, it does make sense to be long the smaller stock, think i might incorprate that into my trading plan going forward on a discretionary basis.
 
I agree mkt cap is important, more important??, depends on the pair I think. A billion dollar mkt cap stock trading at 11 P/B and a 4 billion company trading at book value, who is more likely to get bought out?
 
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 pairs because I find it easier to manage the relationship between the too than it is to pick a direction a stock will go. Once a direction is clear, you can always cut bait and let the winner run while shedding the loser. or scalp profits throughout the day

Whatever works best for the trader. My time frames are short so the statistical relationship is more important than fundamentals.
 
I have been trading pairs for about 10 years. Mergers and surprise guidance are what will kill you. For guidance you need to look at the history and see if the companies have done it in the past. For mergers avoiding going long the the top 10%-20% of the industry can save you(not always) and you might get the benefit of a merger on your side. But you are doing cross industry so you still will have the problem. Also pairs 101, dont hold pairs into earnings unless with an option hedge.
 
Quote from Rehoboth:

I have been trading pairs for about 10 years. Mergers and surprise guidance are what will kill you. For guidance you need to look at the history and see if the companies have done it in the past. For mergers avoiding going long the the top 10%-20% of the industry can save you(not always) and you might get the benefit of a merger on your side. But you are doing cross industry so you still will have the problem. Also pairs 101, dont hold pairs into earnings unless with an option hedge.
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Good advice, and i agree 100% on earnings...no matter how long you've been trading a stock, know a sector, pair, ect., earnings is still a crapshoot plain and simple...i got into that gambling mode back in march holding a big position of BGP/BKS the day of earnings...I was so cocky I was even telling ppl days before the event that I would clean up in the position...well being long a stock that was down as much as 40% on the day and short the one up 10% taught me one helluval lesson! That was my worst trading day ever and it stung even more being so full of my myself shooting my mouth off beforehand!
 
Quote from yobo:

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 pairs because I find it easier to manage the relationship between the too than it is to pick a direction a stock will go. Once a direction is clear, you can always cut bait and let the winner run while shedding the loser. or scalp profits throughout the day

Whatever works best for the trader. My time frames are short so the statistical relationship is more important than fundamentals.
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I tend to put a pair on that is fundamentally biased and then trade that position until it becomes neutral. Timing is much less of an issue, distribution of layers is more important. But I also scalp positions which like you said is all about ATR, relative strength/weakness and timing. I try to cover as many time frames as possible with different pairs and different objectives with each. I also look for investable pairs with 20 or more points of upside potential to buy and hold, or layer with larger layer distribution levels. Timing of these longer term trades is critical as is much due dilligence and fundamental research.
 
Ok some useful information there, definately incorprated into my trading plan. Do any of you guys pair trade small caps? what are they like to trade?

One Trade today, I'm short the large stock and long the smaller stock. Also IR has a lower PEG & PB relative to ITW.

Long IR @ 36.93
Short ITW @ 49.61

Open Trades: 12
 

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Quote from jonnysharp:

Thanks for your support yobo.

One trade today, a nice divergence between the ratio chart & RSI chart drew my attention to this pair.

Long POT @ 177.04
Short CF @ 146.85

Open Trades: 8
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are you taking the right decision?
why do you do this trade if the correlation is falling?
look guys I think you are misinterpreting the whole system.
I trade spreads in futures market but I have a ATS to do them due to the need of speed transaction. I can trade the spread USO/OIL both ETF´s , I know they are correlated from the beggining, ok.
But in your case you are doing this the wrong way.
You are buying POT and selling CF when the correlation is falling and you do this based on the divergence of the RSI and the ratio.
man, dont do that.
Take the opportunity whenever the correlation is above 80 but with it in an uptrend. And then act on the RSI lower/higher bands. Correlation should be high like 95%. If not, wait for the correlation to start an uptrend.
I didnt know this software and maybe I will buy it to test Pairs, but its not my core biz.

Good luck with that pair
 
Thanks for the heads up powersignals, its funny you say wait for the correlation to be in an up-trend as I was just looking at that exact condition for an filter a few hours ago, looking back at the charts and signals generated they are definately more reliable when the correlation chart is an uptrend, something more to add to my trading plan.

Glad I started this journal already learnt heaps from more experienced pair traders, helps my position trading aswell knowing these things. From my CF/POT pair trade, which isn't looking to good atm ive learnt CF is being added to the SP500, it's undervalued relative to POT, is a smaller company relative to POT, and the pair has a falling correlation. I'm going wait for the pair to technically revert to the mean as usual before I get out, probably a loss but trade size is small relative to my a/c size, good leason I guess.

Some of you may have noticed I haven't taken any trades in the financial sector, I'm doing that on purpose as I think the risk of a fat-tail event is currently high, however when the turmoil subsides I think financial stocks will be fertile for trading because of the volatility. I think I will have to increase the number of pairs on my radar with these additional filters, might have to venture into the small cap space. Currently I have 278 non-financial pairs on my watchlists above 70% correlation, I might have to increase my universe to 500 pairs.
 
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