Pair Trading Strategy Journal

[jonnysharp]

Quote from waltbx:

Yah, well, thanks, but I took some losses soon after my post. "Pride goeth before a fall."

My profit is down to $3200. I'm not complaining, but thought I'd be straight with you guys. One large loss was a short on BARC (Barclay), a financial. The day after I sold it short, good news came out, and I cut my loss at $800 (on $2500 investment). I learned to stay away from financials, as someone posted earlier on this thresd. I ignored the advice. Financials have too much possibility for individual stocks to issue good or bad news in this climate.

Foolish mistake. But I learned something.

Thanks for the nice remarks. I'm a little gun shy now.

Walt B

Yes I haven't pair traded financials at all, said right at the start of the journal that I prob won't be trading them to 2010, and even then Im not sure, fat tail risk is too high. I can't wait to things settle down in the financial sector, because there are 1000's of highly correlated pairs that offer really good trade opportunities because of the close similarities in their businesses, cost of capital being a big one.

Don't worry about your mistake, consider it a tuition fee, believe me mistakes are a blessing as they teach you what not to do, what is more important than what to do, its the trades you don't take that count the most.

 

[jonnysharp]

Quote from waltbx:

Thanks for this, Jonny. I'll try to put it into practice. I'll add it to by worksheet spreadsheet.

I don't understand what you mean by "fade that direction."

Also Saico's tip about avoiding pairs that resist going into the top 1/3. "...that resists at least in the upper 3rd of its recent 150 days trading range seems to be optimal. " But Saico, I'm not clear on what you mean by the top 1/3 of the recent 150 days trading range. Could you be more specific?

Walt B

For example.......If the 50 day high of the spread is $10 and the 50 day low is $5, and I got a signal to go long stock A @ 30 and short stock B @ 39, hence betting on a decreasing spread, I would want the current spread reading to be in the top range of the 50 day spread chart, in the above case I would want the spread to be around $9 or higher, so im fading the direction of the spread if that makes sense...

 

[jonnysharp]

Quote from NKNY:

Curious, has anyone tested different settings on the lookback periods... IE, what happens if ratio lookback 14, stretch 14 are set to 20. Wont extending the lookback smooth out the ratio moving average and produce less trades.


Nick

Yes I increased the settings once and backtested them, found avg time in trade increased(not good) and PnL decreased, so I just figured I leave it on default, I think the guys that developed it would have tested for the best settings.

 

[jonnysharp]

Quote from knocks420:

Just wanted to bump my question regarding intra-day pairs trading, anyone currently doing or thinking of doing so?

No currently happy with swing trading pairs, haven't ventured down the intra-day path.

 

[jonnysharp]

Quote from waltbx:

FYI a couple of trades Friday and Today (Monday). I won't clutter Jonny's journal with my trades, but someone thought my use of expected ratio and expected profit was interesting.
My trade size is $2500 each side.

A pair entered Friday:
Long CS @ 30
Short LYG @ 4.29
Ratio 7 Expected ratio 9.51 for a profit of 9%
Closed CS today (without a signal from PTF) at 27.83 for a loss of $185. Letting LYG run with trailing stop loss, currently a profit of $400.


A pair entered today:
Short CCO @ 3.31
Long HHS @5.38.
Ratio: 0.615. Expected ratio 0.560 for profit of 4.5%

Walt B

Interesting, you cut one side and let one side run, is this a bet the market is going down? or are your trying to cut the losing side quickly and let the profitable side run? what sort of trailing stop do you use? %, $, pt-based, ATR, MA?

 

[jonnysharp]

Closed my same stock arbitrage trade on Monday for a profit

Sold SU.TO(TSX) @ 28.25
Covered SU(NYSE) @ 22.12

 

[LazyLightnin]

Hi Walt,

When I upgraded to the latest release of PTF my correlation charts had a huge dip in them right at that point. I installed the software and cleaned the database per your post on the subject and my charts look completely different as compared to the screen shots I took at the time a trade was initiated.

I made a post the other day about two pairs being at a zero deviation reading but the history showed no exit or in trade bar color and I sold them. Nobody responded with a similar experience, but I wonder if that has something to do with it.

Thanks for the information. My charts look better!

Hi Jonny,

I have done the same thing as Walt, holding one side of a pair. I have actually done it the opposite way though. I have sold a winning position and held the loser with a tight stop because the loser typically is a function of market direction. I just figure if we've had a few up days in this market we are due for a pull back. I gained back almost $300 on a short Monday using that approach. No science, just gut feel, and a gap of the market in the opposite direction could be painful. I think it's best to play the pairs straight up.

 

[waltbx]

Quote from LazyLightnin:

Hi Walt,

When I upgraded to the latest release of PTF my correlation charts had a huge dip in them right at that point. I installed the software and cleaned the database per your post on the subject and my charts look completely different as compared to the screen shots I took at the time a trade was initiated.

I made a post the other day about two pairs being at a zero deviation reading but the history showed no exit or in trade bar color and I sold them. Nobody responded with a similar experience, but I wonder if that has something to do with it.

Thanks for the information. My charts look better!

Yesterday I rebuilt my data base in PTF and the charts were repaired. Today 19 of my first 40 stock had charts missing data from yesterday, so I rebuilt them today. Fixed, again.

But charts on the individual stocks are in reverse chronological order. Not the chart that appears from the Stock List, but the chart that appears when choosing a pair in the Console.
Can anyone suspect a good reason for this, or is it a programing error?

Walt B

 

[Ivan]

Quote from waltbx:

Yesterday I rebuilt my data base in PTF and the charts were repaired. Today 19 of my first 40 stock had charts missing data from yesterday, so I rebuilt them today. Fixed, again.

But charts on the individual stocks are in reverse chronological order. Not the chart that appears from the Stock List, but the chart that appears when choosing a pair in the Console.
Can anyone suspect a good reason for this, or is it a programing error?

Walt B

Hey Walt,

I ran the "database cleanup" script you posted and it looks like it's done some bad things! Most of my pairs now have either 0 , -100 or +100 correlation
when looking at them thru the console.
If I analyse some of them, it has only brought in 2 days of data, so it's not pulling in the history again.
If I refresh the pair it doesn't make any difference.
Hope I don't have to delete all the stocks and add them again....

regards
Ivan

 

[waltbx]

Quote from Ivan:

Hey Walt,

I ran the "database cleanup" script you posted and it looks like it's done some bad things! Most of my pairs now have either 0 , -100 or +100 correlation
when looking at them thru the console.
If I analyse some of them, it has only brought in 2 days of data, so it's not pulling in the history again.
If I refresh the pair it doesn't make any difference.
Hope I don't have to delete all the stocks and add them again....

regards
Ivan

I don't think you need to worry about your pairs being lost, it's just the data associated with those pairs.

Here's what I'd do. I'd shut down PTF and try again. Copy and paste the script exactly. If that doesn't work, email Jason at PTF.

I too have some pairs that have very low or negative correlation, yet have good ratios. I don't understand that. Not well correlated, but very profitable.

Walt B