Pair Trading Strategy Journal

Quote from jonnysharp:

As per several requests Id thought Id do a performance update.

Start of journal: 18th August, 2008
Cut off date: 22nd April, 2009
Return: 93.73%
Annualized: 139.89%
Biggest Drawdown: 8.9%
SP500 Return: -33.4%
Outperformance: 127.13%

Using a generous risk free rate of return of 3% my sharpe ratio is 15.38 ((139.89-3)/8.9) long term stock market average is 0.40, hedge funds consider above 2.00 to be good and above 4.00 to be exceptional, so Im very happy with my risk-adjusted returns and my absolute return aswell.

Below is my a/c equity curve since starting, you can see a soft patch at the start when the market was very dislocated last year and when I didn't have my current trade filters, since then Ive improved my performance and conservatively increased my trade size.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2398842>

Also attached is a pdf doc showing all my trades Ive taken exactly as Ive entered them in this journal in real time, no hindsight trades.

I really owe a big thank you to the team at pairtrade finder for sharing an incredible piece of software that actually has worked for me, it has definitely changed my life for the better.

Jonny.
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nice performance but there is a basic problem with your sharpe ratio calculation. You should calculate a monthly or weekly standard standard deviation of your portfolio, annualize it and then use it in the formula instead of using max drawdown which can massively inflate your sharpe ratio.

Thankfully you can easily find calulators for std. dev on the internet and it would hardly take 1 min to fill it up and get the result
 
I have few questions to Jonny or anyone else working with PTF for a longer time:

1. I observed that you incorporated the percentfrommean chart into your trading. How important is this chart in your trading stile, how do you interpret the chart, any rules?

2. Seems like volatility is not that important factor in your trading style since sometimes the chart is going up or down. Or do you invest less capital in pairs with high volatility?

3. By using back tester, do you have it set to 360 days? How do evaluate the chart in the back tester since it will appear differently in the watch list due to a different (shorter) time frame?

4. In this journal you mentioned that you may incorporate stops into your trading plan in the future. Are you using stops now, and if yes what kind of stops?

The stop seems to make sense to me. Currently I have a very ugly trade. On May 13, I bought BLKB and shorted PTI. I am 10% down on this position now and this takes about 25% of my profit. (I had 17 profitable trades, but none of the profit was as high as 10% and usually I only make small profit). And although my position sizing is small, still the one trade cuts my profit significantly. I didn’t sell it yet, as I am waiting for the exit signal, but it makes me nervous :mad: What to do?

Thanks for any help on this.
 
Dr who, yes Im running a beta version at the moment, been providing feedback for them, you could prob get a copy too, just email them.

Kevin, yes I may have missed listing the entry on that pair, don't have the time to go through all the posts, however to verify in ptf the signal was generated on the 30th of April, I entered AXS @ 24.63 and short PRE @ 68.19, small profit on the trade.

Treve, I like to see the % from the mean near record highs or lows as advised by ptf, no I don't look at volatility anymore, I don't understand your pt 3, not using stops, happy with the way it is now, you could use a time based stop, however if your trading conservatively any one position going against you shouldn't risk blowing up your a/c, keep position sizing small relative to a/c.
 
Quote from Treve1: Currently I have a very ugly trade. On May 13, I bought BLKB and shorted PTI. I am 10% down on this position now and this takes about 25% of my profit. (I had 17 profitable trades, but none of the profit was as high as 10% and usually I only make small profit). And although my position sizing is small, still the one trade cuts my profit significantly.
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You may have the same problem as me, I dont ride my winners as much as I should.
 
Quote from jonnysharp:

Exited trade yesterday

Sold CMP @ 52.19
Covered SYT @ 46.81
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This trade highlights some of my concerns.
According to my records, this trade was open for close to a month and a half, and besides the loss incurred would have tied up capital for a relatively long period. Any second thoughts about using a time stop? Do you have many examples of 30 day plus
profitable trades?
 
Quote from neospecialist:

This trade highlights some of my concerns.
According to my records, this trade was open for close to a month and a half, and besides the loss incurred would have tied up capital for a relatively long period. Any second thoughts about using a time stop? Do you have many examples of 30 day plus
profitable trades?
More...

The trade was opened 15th April.

The loss should be around 3.5%.
Besides the loss, there is the opportunity cost and interest you have to pay on some short positions or if you are leveraged.

Anyway, John mentioned it was a smaller position than usual.

But you raised a very important point.

A stop based on maxim holding time, it's something I have though many times before.
But still don't know if it's the better choice. Maybe someone more experienced can enlighten us
 
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