Pair Trading Strategy Journal

[total_keops]

Closed one trade:
Covered FITB @ 8.12
Sold FNF @ 15.15
+0.8% after fees
I expect FITB to be strong because they dont raise to repay tarp and their peer do so I got out.

Do you guys calculate the P/L % on the amount of one stock or both? I used to do one but I think it's more appropriate on one.
Suppose I go long 1000$ and short 1000$ and make 100$, does it make 10% or 5%?

 

[Dr Who]

I'd always calculate my return based on the total amount risked. So, in this instance, it would be 5%.

 

[Charlie_Sheen]

Quote from jonnysharp:

Charlie, Im pretty sure you can't do that in pt finder, most of us trade dollar neutral because of its simplicity and it works fine, interesting concept though.

Thanks for the response Jonny.

Let me make sure I understand.

You use the actual raw prices for analysis and then adjust to dollar neutral for actual trading ...

For example ... If you have Stock A at $30 and Stock B at $10 - you run (or Pair Trade Finder runs) the analysis simply using the raw prices. No adjustment is made for the 3 to 1 difference in the prices.


After you get your signal(s) you may (for example) buy 100 shares of Stock A and short 300 shares of Stock B to achieve dollar neutrality.

Is this correct?

 

[tatankas]

what you think about short ebay, long ostk?

Ok, big difference in market cap, anyway seems a a trade with great potencial.

 

[Don87109]

Quote from Dr Who:

I'd always calculate my return based on the total amount risked. So, in this instance, it would be 5%.

Yes, but the total amount at risk is technically unlimited if you have short stock.

BTW, I have never seen a good answer to this question.

Don

 

[jonnysharp]

Quote from total_keops:

Do you guys calculate the P/L % on the amount of one stock or both? I used to do one but I think it's more appropriate on one.
Suppose I go long 1000$ and short 1000$ and make 100$, does it make 10% or 5%?

I think measuring by the total $ invested on both sides a conservative way to do it, so in your case I would say 5%.

 

[jonnysharp]

Quote from Charlie_Sheen:

You use the actual raw prices for analysis and then adjust to dollar neutral for actual trading ...

For example ... If you have Stock A at $30 and Stock B at $10 - you run (or Pair Trade Finder runs) the analysis simply using the raw prices. No adjustment is made for the 3 to 1 difference in the prices.


After you get your signal(s) you may (for example) buy 100 shares of Stock A and short 300 shares of Stock B to achieve dollar neutrality.

Is this correct?

Yes I think the data is put through a model which allows the 2 stocks to be compared as 1 to 1, making all assessments symmetrical in their output, and yes dollar neutral for eg..is going long $10,000 of stock and short $10,000 of another stock, simple formula....desired position size / share price = qty of shares to long/short

 

[jonnysharp]

Quote from tatankas:

what you think about short ebay, long ostk?

Ok, big difference in market cap, anyway seems a a trade with great potencial.

I plugged this pair into pt finder, and I tell you what, you have found a great pair to trade, Im going to keep it on my radar, it has a historical 100% win rate with a avg win of $1368 per $10,000 invested and avg trade length of 7.33 days and a wide ranging ratio chart makes this pair a good one. If you have a fundamental bias to short ebay long ostk you may want to wait until the ratio goes to 1.50 or above to initiate a position, the current ratio is 1.43 (ebay stock price is 1.43 times of ostk stock price), 150 day high is 1.54, 150 day low is 1.09, avg is about 1.30, see attached.

 

[tradingtrading]

jonnysharp & others- As I understand it, you close the position when it goes back to the mean. Have you thought or backtested other methods of exiting?

Let's say closing the position at one stddev from the opening, at either a profit or a loss. So for a winning trade you are trading from a 2*stdev event to a 1*stdev event, and for a losing trade you are trying to minimise the loss by keeping it to 1stdev away from the opening.

I find that when you do this, a rough figure of 1.5-2% develops as a take gain/stop loss figure on the trade.

I appreciate that this helps generate more drag from commissions, but it also helps curtail losses due to something truly fundamental having happened to the prospects for the pair.

Is it worth backtesting?

 

[Paulo33]

Quote from jonnysharp:

I plugged this pair into pt finder, and I tell you what, you have found a great pair to trade, Im going to keep it on my radar, it has a historical 100% win rate with a avg win of $1368 per $10,000 invested and avg trade length of 7.33 days and a wide ranging ratio chart makes this pair a good one. If you have a fundamental bias to short ebay long ostk you may want to wait until the ratio goes to 1.50 or above to initiate a position, the current ratio is 1.43 (ebay stock price is 1.43 times of ostk stock price), 150 day high is 1.54, 150 day low is 1.09, avg is about 1.30, see attached.

I have only 63.08% correlation for that pair, isn`t too low?