Pair Trading Strategy Journal

Quote from ScreenLocal:

Hi Jonnysharp,

very interesting thread!

Do you take an equal amount of shares on both stocks. Or do you trade dollar neutral?

I think I read a post somewhere, where you said you try to look for pairs that have nearly equal prices?

But what would you do on pairs like TV-AMC or HES-APC?

-Screenlocal
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I've contacted Pairstradefinder and suggested that in the new version, the log ratio is used as opposed to stock1/stock2. Using the log ratio allows you to compare stocks with different prices-be cautious trading pairs with different prices until this is incorporated as you can get skewed results.

EDIT: Intraday has been especially poor recently however some of the daily pairs are performing. There are still a few very stubborn pairs that are continuing to divert. Intraday momentum may be due to earnings season? Any thoughts on how earnings are affecting pairs?
 
Quote from knocks420:

I've contacted Pairstradefinder and suggested that in the new version, the log ratio is used as opposed to stock1/stock2. Using the log ratio allows you to compare stocks with different prices-be cautious trading pairs with different prices until this is incorporated as you can get skewed results.
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Is this because lower priced stocks naturally tend to have higher volatility? Does the log ratio equalise the value of the instruments?
 
Quote from cipherscribe:

Is this because lower priced stocks naturally tend to have higher volatility? Does the log ratio equalise the value of the instruments?
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Not necessarily more volatile, your just comparing percent moves to percent moves.
 
Quote from ScreenLocal:

Hi Jonnysharp,

very interesting thread!

Do you take an equal amount of shares on both stocks. Or do you trade dollar neutral?

I think I read a post somewhere, where you said you try to look for pairs that have nearly equal prices?

But what would you do on pairs like TV-AMC or HES-APC?

-Screenlocal
More...

Screenlocal, I trade $$$ neutral. I tend to like pairs that have similar share prices, I wouldn't trade a $100 stock against a $10 stock.
 
Nice thread and job Jonny.

Just a question : It 's possible of pair trading on Forex Market ?

Because some pair are very correlated by example EURJPY with GBPJPY.

Someone trade pair trading on Forex ?

Regards.
Ludo.
 
Quote from Surfeur:

Nice thread and job Jonny.

Just a question : It 's possible of pair trading on Forex Market ?

Because some pair are very correlated by example EURJPY with GBPJPY.

Someone trade pair trading on Forex ?

Regards.
Ludo.
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Thanks Surfeur, I imagine you could pair trade forex, however forex is already in pairs, in your e.g. trading those two pairs would be the same as trading EUR/GBP. Id rather pair trade stocks as there's 1000's of liquid stocks giving millions of possible pair combinations so you can really hone in on the best trade opportunties.
 
Quote from jonnysharp:

I eyeball the ratio chart on the pair analyser tab in the program. I don't want the ratio chart to be trending, I want it to be in a wide trading range that is no bigger than 30% of the ratio, also I don't want to take trades on new ratio highs or lows, and I want to see an general oscillation pattern in the chart aswell. I try and think of it like this, if I were a trend trader what ratio chart would look the ugliest to me, then I wait for a program signal for that pair.

Yes for the spreads getting wider whilst in a trade or waiting for a higher deviation, ive played around with the settings in pairtrade finder and found changing the pair stretch to 2.50 - 3.00(I currently have it at 2.00) there aren't many trades generated and whilst it may improve profit per trade it doesn't improve overall profitability. The beauty about pair trading is you can scale into the pair as it goes against you, something i haven't done yet however I most likely will incorprate it into my trading plan next year after learning the ropes with one layer.
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What do you mean by no bigger than 30% of the ratio. Also why do you avoid taking new ratio high/low.
 
Quote from Trend Fader:

What do you mean by no bigger than 30% of the ratio. Also why do you avoid taking new ratio high/low.
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By 30% I mean if the ratio is at 1.00 I don't want the 6month low below 0.85 and the 6month high above 1.15, not a solid rule but a general rule, also I don't want to fade the direction of strong ratio trend that generally occurs when the ratio is making new 6month high/lows.
 
Do you pay attention to market cap size... meaning say one stock is $5bil market cap and the other is $50bil- would you consider this a valid pair?
 
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