When you hear the term ''opportunity quickly disappear'' that is referring to high-frequency arbitrage, trades based on a small timeframe, seconds/minutes, thats what the big players are doing, same logic as us but on a grander scale, lower timeframe/thousands of trades per day, thus those opportunities come and go very quickly. We are trading intra-week, the opportunities are longer lasting and we aren't competing against the big players, its a market of our own allowing us to profit.
Pair Trading Strategy Journal
- Thread starter jonnysharp
- Start date
When you hear the term ''opportunity quickly disappear'' that is referring to high-frequency arbitrage, trades based on a small timeframe, seconds/minutes, thats what the big players are doing, same logic as us but on a grander scale, lower timeframe/thousands of trades per day, thus those opportunities come and go very quickly. We are trading intra-week, the opportunities are longer lasting and we aren't competing against the big players, its a market of our own allowing us to profit.
I trade very conservatively and yes I have increased my trade size, its up 25% since the start of the journal and I plan to increase again soon.
ok thanks for the explanation. sounds like a clever way to trade.
good luck w trading, great journal!
Varima
i guess it's fair question. if hundreds, maybe thousands, of heavyweight players are scanning the market like crazy.
maybe they are taking opportunities they think are the most reliable, 70-90% chance of success, so those disappear more quickly
the lower-probability trades (not necessarily bad, maybe say 60-70% change of success) may remain in the market longer . ..
this is just a guess . . .
i mean it's a fact that there are opportunities in pairs trading for retailers as well, it's just interesting to get practicing traders' take on this
A finance professor and his graduate student are walking along the street when the student spots a $100 bill and stops to pick it up. The finance professor says, "Don't bother to bend down to pick it up; if it were really a $100 bill, it wouldn't be there."
A few ideas that turned up in my screens this weekend:
In the small cap arena, a Long in KNDL, Short in PRXL. Currently KNDL is trading at $10.92 and PRXL at $10.88. The pair is more than 2 standard deviations from the mean, and the valuation and fundamentals also support the pair.
In the large caps, a long in INTC and short in TXN is warranted. Just under 2 standard deviations, and again, the fundamentals support the trade. INTC currently trading at $16.23, TXN at $20.23.
Lastly, a long in RDC against a short in NFX. RDC at $21.87 and NFX at $38.08.
Just throwing a few ideas out there for anyone who may care to take a look. Full disclosure: I put all these trades on. Disclaimer: Past performance is no guarantee of future performance. You can expect to lose money, blah blah blah. LOL
In the small cap arena, a Long in KNDL, Short in PRXL. Currently KNDL is trading at $10.92 and PRXL at $10.88. The pair is more than 2 standard deviations from the mean, and the valuation and fundamentals also support the pair.
In the large caps, a long in INTC and short in TXN is warranted. Just under 2 standard deviations, and again, the fundamentals support the trade. INTC currently trading at $16.23, TXN at $20.23.
Lastly, a long in RDC against a short in NFX. RDC at $21.87 and NFX at $38.08.
Just throwing a few ideas out there for anyone who may care to take a look. Full disclosure: I put all these trades on. Disclaimer: Past performance is no guarantee of future performance. You can expect to lose money, blah blah blah. LOL
Hedge funds CAN and DO use this strategy, typically with a longer time frame than seconds,minutes,hours,or days.
The reasons are many for why stocks diverge, but it is my opinion the major reason is because the vast majority of money is ran by mutual funds, who are long-only. Their buying and selling creates opportunities versus a much smaller lot of folks that play in the stat arb space.
I think what johhnysharp may have been speaking of are funds like Renaissance Capital, the large hedge fund founded and ran by James Simons. They are known to run their lightening-quick algorithms to capture pennies in hundreds of stocks throughout the day.
Im not saying the big players would ignore these opportunities, most of them are focusing on high-frequency, some of them may be trading intra-week aswell, however we are on a more level playing field when it comes to intra-week trading as we don't stand a chance competing against them in the high-frequency game.
Is there a possibly that they have a higher minimums on market cap also?
i.e They wouldnt touch pairs with stocks less than 5b, due to liquidity? The size they trade would probably drive smaller cap pairs back to the mean straight away
Whereby retail punters have the opportunity to take smaller 10-100k positions without having much impact on the ratio
i.e They wouldnt touch pairs with stocks less than 5b, due to liquidity? The size they trade would probably drive smaller cap pairs back to the mean straight away
Whereby retail punters have the opportunity to take smaller 10-100k positions without having much impact on the ratio
Yes most hedge funds have mandates telling them what they can only trade, some are only restricted to the SP500, others to market cap above 1b, so yes there are plenty of opportunities for retail traders that wholesale traders can't take.