Pair Trading Strategy Journal

Quote from dealmaker:

PFE/WYE, 300X100. WYE long, dividend due on 06/08. Sell on 06/05.

KO/PEP, 100X100. KO long, dividend due on 06/11. Sell on 06/10.

Both pairs are $ neutral.
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Hi dealmaker. Can you explain your logic on the latter pair, KO/PEP?

The reason I ask if because I took the inverse of that position off yesterday (long PEP, short KO) after having held it for several days (it was -1.8 std deviations from the mean.) It currently sits at -1.1 std dev. I am actually looking for a retracement to put the position back on.

Thanks.
 
PEP had dividend on 06/02 we collected the profit from the surge leading to the dividend and closed the position. KO has dividend on 06/11 so now created a new position KO long, PEP short.
Note, I am not looking to collect the dividend necessarily but, mostly to benefit from the surge leading to the dividend.
 
Quote from cooper1308:

All it takes is a little effort to realise there is a massive change in the underlying fundamentals and you'll soon realise some "great trades" are actually suicidal
:cool: :cool:
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No trade is suicidal unless your position size is too big.

Jonny has stressed many times that he only trades small position size relative to his account. This seems to be a sticking point for pair trading criticism. No single trade is important in the scheme of 1000 trades.

Fundamentals, I am sure, can be helpful for those who have the ability to read them correctly, and have good and current data. I don't know enough about fundamentals for them to do anything but confuse my execution strategy. Sure I can read PE, PEG, Mkt Cap, and if I stretch my head, even EBITDA, but Yahoo data is old relative to our trading timeframe, and most of the 'avoidable' bad trades have bad fundamentals only with my restropective eyes....

Just my 2c - it just comes down what works for the individual - if you have had success with fundamentals in the past, I am sure they can be a valuable asset to Pair Trading.

Adrian
 
Quote from Angelo_60:

Not using financial series, my best example of a cointegrated couple: think about two lovers who often argue about where to spend the week-end: A would like to go the beach, C would like to go to the mountains.
Most of the time they depart together on Saturdays for the same destination after reaching a temporary agreement; sometimes they are not in agreement and spend the week end split.
But, as there is true love (=they are cointegrated) they all come back to the same home on Sunday evenings.
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Nice analogy, and thanks for clearing it up for me.

So it seems like PTF users may be approximating cointegration by trading non-trending ratio charts, and entering when pairs are see at high deviations from the spreads mean point. Walt may have a point about scanning stocks based on their historical profit performance (showing retrospective cointegration), and not filtering on correlation.

When I look at Jonny's previous trades, I see a link between profitable trades and increasing correlation, and losing trades and decreasing correlation. Not a big sample, so it's a tenuous link.

All good stuff to spend the idle hours investigating different ideas. I appreciate the info and the links Angelo.

Adrian
 
Quote from Treve1:

For me the system is working this way:
In May I made 34 trades. I closed 20 trades for a profit and only three for a loss. One would think this is a great achievement, but it is not since I am still keeping 11 pairs and most of them are awful. The worst pair is PTI – short and BLKB- long. Alone PTI I am currently 47% in minus, this is by far too much. Good thing I am taking only small positions, but still this doesn't save me.

I am sure that most of the 11 pairs I will sell for a loss and should I sell them now I would wipe out all of the profit I already made with the 20 profitable trades. Actually I would be in a big minus assuming I sold all the 34 trades as for today. But I am waiting for exit signals......

Successful Trading means: Cut Your Losses and Let Your Profits Run, but the strategy is doing the exact opposite. I have the impression that I am cutting the winner and I let the losses run. I am happy with the exit signals, but sometimes I could sell half of the position, protect myself with the stop loss and try to make more money.
More important however, is cutting the loosing trades. It does make sense to be long the smaller stock since the majority of my losing trades are the trades I went short.
Secondly, it will be necessary to observe the news for all the pairs. This would take some time but it would pay off. Does anyone know what news would be the most important to check? What are the best websites to check for news quickly and efficiently? Any other suggestions? Does anyone experience similar problems?

Last week seem not to be good for mean reversion.
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i think i read that a 70% portion of a stocks movement is mostly attributable to the indices and the market.

As johnny has often said short turn pair trading is mostly tech.:D

cheers
john
 
Quote from bentedges:

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
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Quick follow-up:

I have taken a portion of these off. Over $2 in the long KNDL, short PRXL. I'm leaving some on, but wouldn't surprise me to see a bit of a pullback in the pair given the run KNDL has had over past few days. KNDL currently at $13.40, PRXL at $11.46.

Assuming one weighted the long INTC, short TXN at a 3:2 ratio, a little bit of profit can be had, but ultimately I expect the pair to converge to -$3.00 or so. INTC currently at $16.13, TXN at $19.89.

A 2:1 ratio in the long RDC, short NFX should have one up nicely. This one works for more me thinks. RDC currently at $22.10, NFX at $35.87.

Again, just my 2 cents.
 
Quote from total_keops:

Look at any pair that was with VOW.DE (Volkswagen, see in Yahoo) in november 2005.
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No more than 10% on each position, and you will be fine :)
 
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