Pair Trading Strategy Journal

[yobo]

I use statistical correlation based on closing prices of the two stocks in the pair.

Interesting enough, the cf/pot pair is now profitable and underscores the importance of layers.

 

[gehko]

Quote from yobo:

I use statistical correlation based on closing prices of the two stocks in the pair.

Interesting enough, the cf/pot pair is now profitable and underscores the importance of layers.

Could you go into a little detail on when/how you layer and possibly what you look for?

 

[yobo]

My database identidies pairs when the ratio is out of whack...beyond two std. dev's. Plus I track RSI and a few other conditions.

Typically, when my system identifies a pair, I'll put it on my radar and watch throughout the day and enter at end of day. Since the pair is highly correlated meaning they should trade in tandem, I'll look for a day that is out of whack like last Friday. CF was quite strong and POT was quite weak. I netered a layer near the close. Today we see some mean reversion and POT outperforming CF. Trade becomes profitable. at the end of day I'll take those profits and maybe even consider flipping it given the underperformance of cf versus pot today.

Make sense? Another pair that showed up on the radar was long ir and short itw based on Friday closing prices. Today IR is down and itw is up. At the end of day, I'll go long ir and short itw.

 

[yobo]

Here's another example. Long MOS short MON. MOS is taking it on the chin today compared to MON. MOS is down 8% versus MON down 4.48%.

Pretty good odds that tomorrow the returns will reverse and MOS will outperform MON assuming MOS stays weaker than MON.

No real science involved other than buying weakness and shorting strength.

 

[yayt]

I've been following the thread and yobo, I agree, your MOS/MON trade looks good, I wish I had entered it at the close. If it doesn't gap up then I think I will enter.

 

[jonnysharp]

Was talking with some other experienced pair traders today, they expect the next several years will be great for pair trading, range-bound markets, high volatility & hedge fund closures, good for us I guess.

Closed 2nd trade today for a profit:

Sold GOOG @ 465.25
Covered AAPL @ 166.19

Opened 2 new trades:

Long GENZ @ 77.84
Short BAX @ 69.79

Long APA @ 106.34
Short ECA @ 71.26

Open Trades: 13

 

[Joab]

Quote from yobo:

Here's another example. Long MOS short MON. MOS is taking it on the chin today compared to MON. MOS is down 8% versus MON down 4.48%.

Pretty good odds that tomorrow the returns will reverse and MOS will outperform MON assuming MOS stays weaker than MON.

No real science involved other than buying weakness and shorting strength.

BUY Strength and SELL weakness.

You will be much happier once you adopt this attitude.

Long CF / 725 shares @ $138, Short POT / 615 shares @ $162

 

[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?

 

[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.

 

[yobo]

Nice work so far Johnny on taking profits again.

Any observations about the pairs you are still holding? Overall have you made money or are some of the losses you carry wiping out the gains you've captured?