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Pair Trading Strategy Journal
- Thread starter jonnysharp
- Start date
pair trading is probably the safest method to protect against a black swan event. Remember both stocks may go down, but the weaker stock should go down more. You may incrue losses but they will be less than if you didn't have a pair on.
With pairs I don't like to use stops. I usually won't close out a pair unless something fundamentally has changed to change the order of the pair.
With pairs I don't like to use stops. I usually won't close out a pair unless something fundamentally has changed to change the order of the pair.
Quote from newguy05:
but it still doesnt protect against overnight risk. My biggest fear of pair trading is what happens when one leg gaps overnight due to blackswan / news. Sure your stop loss will be hit in the morning when market opens but you will already be down/blown up, especially considering most of the pairtrading are pretty leveraged to make decent profit as they are considered hedged/market neutral.
How do you protect against something like that? Only thing i can think of is to trade very stable company pairs like pepsi/coke etc..where the chance of such event is minimal.
the way I see it.....it's foolish not to add another layer when the pair goes out of the money. but this is why people get blown up. so add layers not every 1 stddev but 2 or 3...... and do just 1 or 2 layers......this greatly increases ur w/l ratio.
without adding layers, your chances of winning isn't very good. best thing about pairtrading is its high probability of winning. and to exclude the option to add layers, or to NEVER do layers is not the solution. How often do you guys get in the money right away anyways.........
Only protection against the overnite news/takeover is try not to short the smaller companies. let smaller stocks be the long leg and bigcaps the short let. should research which stocks are good takeover candidates and avoid using pairs on these stocks.
Quote from yobo:
pair trading is probably the safest method to protect against a black swan event. Remember both stocks may go down, but the weaker stock should go down more. You may incrue losses but they will be less than if you didn't have a pair on.
With pairs I don't like to use stops. I usually won't close out a pair unless something fundamentally has changed to change the order of the pair.
Wrong......if the news is that bad, your hedge will help just a bit, and maybe not at all.
I closed my ugly POT/CF trade today for a profit! Still I will be adhering to my new rules with trades like that.
Sold POT @ 162.05
Covered CF @ 131.20
Couldn't find any new trades today that fit my criteria, I will work on expanding my universe this weekend.
Open trades: 12
Wins: 6
Losses: 0
Have a good weekend everyone.
Sold POT @ 162.05
Covered CF @ 131.20
Couldn't find any new trades today that fit my criteria, I will work on expanding my universe this weekend.
Open trades: 12
Wins: 6
Losses: 0
Have a good weekend everyone.
Quote from forsalenyc:
the way I see it.....it's foolish not to add another layer when the pair goes out of the money. but this is why people get blown up. so add layers not every 1 stddev but 2 or 3...... and do just 1 or 2 layers......this greatly increases ur w/l ratio.
without adding layers, your chances of winning isn't very good. best thing about pairtrading is its high probability of winning. and to exclude the option to add layers, or to NEVER do layers is not the solution. How often do you guys get in the money right away anyways.........
Only protection against the overnite news/takeover is try not to short the smaller companies. let smaller stocks be the long leg and bigcaps the short let. should research which stocks are good takeover candidates and avoid using pairs on these stocks.
By "adding layers" I assume you mean you average down on the position? If so then I assume you do this because your entries are usually not that great?
Quote from forsalenyc:
the way I see it.....it's foolish not to add another layer when the pair goes out of the money. but this is why people get blown up. so add layers not every 1 stddev but 2 or 3...... and do just 1 or 2 layers......this greatly increases ur w/l ratio.
without adding layers, your chances of winning isn't very good. best thing about pairtrading is its high probability of winning. and to exclude the option to add layers, or to NEVER do layers is not the solution. How often do you guys get in the money right away anyways.........
Only protection against the overnite news/takeover is try not to short the smaller companies. let smaller stocks be the long leg and bigcaps the short let. should research which stocks are good takeover candidates and avoid using pairs on these stocks.
Trading pairs it's actually very easy to calculate the potential loss exposure for X amount of layers...you really have to understand their ranges, everything from the 5 day to the 2 yr and how the trend.
I'm actually in the process of increasing my position sizes this w/e. I know how much heat I can expect to take from each position for X amount of move and what that represents of my account. I allocate a maximum of 3-4 layers but as i mentioned before these are never layered arithmetically, i vary the size all the time which is a big factor in my consistency.
Quote from jonnysharp:
I closed my ugly POT/CF trade today for a profit! Still I will be adhering to my new rules with trades like that.
Sold POT @ 162.05
Covered CF @ 131.20
Couldn't find any new trades today that fit my criteria, I will work on expanding my universe this weekend.
Open trades: 12
Wins: 6
Losses: 0
Have a good weekend everyone.
I had a huge PNL turnaround today as i was fighting my CF pair and actually went extra long 40% CF yesterday near the lows when the stock was so battered. That's what I like about pairs is that there are many different techniques and skills you develop to increase profitability.
Quote from javs5150:
By "adding layers" I assume you mean you average down on the position? If so then I assume you do this because your entries are usually not that great?
Yes and no..... when you initiate a position in pairs.....that's because you find variance in 2 highly correlated stocks. for instance, you find ABX up 2 bucks and GG down 1. this is very unusual and upon confirming that this crosses 2 std dev, u go long GG and short ABX. This entry cannot be great initially b/c you're expecting not 1 but 2 stocks to reverse pattern. so in most cases like this I find myself out of money at least for few minutes. and for traders like johnnysharp and yobo here, who swings for days, it's not uncommon for the position to be out of money for days. that's why this strategy, although high chance of winning, requires alot of patience.
johnny, thx for the excellent thread, I'm really enjoying all the comments here. Could it be possible for you to post the actual winning spread? for instance on your last trade POT/CF pair............post something like +1.35 .....don't need the $ amount. good luck
Quote from GGSAE:
I had a huge PNL turnaround today as i was fighting my CF pair and actually went extra long 40% CF yesterday near the lows when the stock was so battered. That's what I like about pairs is that there are many different techniques and skills you develop to increase profitability.
I "was" underwater too but it's getting better now and I expect it to be a winner by Tuesday.