Pair Trading Strategy Journal

[colonelangus]

Quote from samueldoernte:

My bias has been opposite, short ATI, long RTI 160x200, got flat today around 5 in the spread. It does look about ready to flip the other way. I would have additional capital ready to layer this one though as it has the potential to continue moving against you. I use distribution levels of around 2 dollars.

i hear you, man.

this thread seems generally for the folks that are trading using pairtradefinder.com or something similar that will alert you to a correlated pair's divergence without much concern for a bias based on fundamentals. all short term, no focus on intraday production and definitely not layering, etc.

however, i have gotten a few good pair swings/scalps from this site over the past few months so wanted to throw something out there that seems to go with their trading style, i.e. short term overextension of correlated stocks' differential.

$2 layers seems good for .7 ATI - RTI. what is the 20 day ATR, about 80 cents? ahh, whatevuh.

best of luck with your trades, bro

 

[jonnysharp]

Great discussions going on guys, enjoying reading it all especially other pair trade idea's, nice to see others perspectives.

New trade

Long AHL @ 25.24
Short PTP @ 33.47

 

[bentedges]

Quote from colonelangus:

tough not to play with momentum in these momentum friendly, trending markets but if you can also take something out with these relatively stress free, market neutral strategies, tear it up, dude

also, good to hear that you held onto some of it. i think to trade some and hold some for the bigger moves if the commish is not cost-prohibitive.

wondering on a pair like MAS-WHR, how much do you (or anyone; Johnny, Total, Saico, trading2) consider the aspect of biz practice correlation or do you just go with the differential correlation and cointegration? do you think that in some cases, it may be just coincidental or do you just work it until it doesn't work anymore? if WY wasn't coming out with earnings tomorrow, what do you think of that with MAS as a better fit or even better, TWP is fundamentally better than WY, though the spread is not as extended on a weekly thus not quite ripe?

thanks much and good luck increasing the probability of stumbling upon more nuts

Generally speaking, I try to put pairs on with strong correlation and in the same industry. If not in the same industry, at least the same or similar sectors. In regards to WHR/MAS, obviously that didn't apply. Coincidence with that correlation? Quite possibly - but I would speculate it is no different than taking a sector long vs a sector short. Example, perhaps one is long the XLK against a short in the XLY. 85% correlation...is it coincidence? Don't know for sure, but given that stocks from different groups generally move in tandem, until the relationship breaks down I think it can be playable.

With WY/MAS, 69% correlation even tho in same industry. This probably speaks to the ongoing, changing fundamentals, which is something I always consider in a trade, especially when I might be holding it for more than a day or two. Fundamentals DO matter.

 

[bentedges]

Quote from colonelangus:

a couple of ideas:

long ATI - RTI
short BMS - SEE

SEE got hammered on OK earnings and in line guidance yesterday and barclay's downgrade today.

long term, ATI has been trending up against RTI.

fundies are about neutral on both pairs, if anyone considers them.

ATI/RTI looks worth a shot to me. It has been trending, but looks short term overdone.

Which, btw, there are good pairs to be found that are trending. One example might be long LM, short TROW. Still not back to parity and slightly less than -1.0 Std deviation. On pullbacks it makes sense to me to see 0.70-.74 in the ratio.

Thanks for the idea, and trade 'em well!

 

[neospecialist]

One of the problems with PTF is that signals are generated with incorrect prices. For example, today I got a signal in the RY/TD pair with a buy of 46.11 in RY. As far as I can tell,looking at real time time and sales, the low in RY was 46.85. In reviewing performance for the system in general, these kind of errors lead to a distorted upward bias which needs to be looked at.

 

[total_keops]

Quote from neospecialist:

One of the problems with PTF is that signals are generated with incorrect prices. For example, today I got a signal in the RY/TD pair with a buy of 46.11 in RY. As far as I can tell,looking at real time time and sales, the low in RY was 46.85. In reviewing performance for the system in general, these kind of errors lead to a distorted upward bias which needs to be looked at.

The problem is not PTF but the data source, if you look at Yahoo, the close is 46.11.

 

[neospecialist]

Quote from total_keops:

The problem is not PTF but the data source, if you look at Yahoo, the close is 46.11.

I agree. But the problem is that there is no realistic way to trade this pair at those prices. In reviewing the performance of the system this"trade" among others will show better results than reality.

 

[cipherscribe]

Quote from neospecialist:

I agree. But the problem is that there is no realistic way to trade this pair at those prices. In reviewing the performance of the system this"trade" among others will show better results than reality.

You get what you pay for. Choose the IQFeed datasource, and alot of these issues dissappear.

I did a test the other day between the two feeds, backtesting 'Business Services', and I ended up with 20% more 'good looking' pairs that were bogus from the Yahoo feed than from IQfeed.

60 bucks a month is not a bad price to pay to remove these headaches imo.

Adrian

 

[ascheer7]

I have Trade Station and went back and looked at RY. It traded as low as 45.82 after market hours so Yahoo showing 46.11 at 9:30 next mornign for last trade is not out of line.

 

[neospecialist]

Quote from ascheer7:

I have Trade Station and went back and looked at RY. It traded as low as 45.82 after market hours so Yahoo showing 46.11 at 9:30 next mornign for last trade is not out of line.

Even if there was a trade of 100 shares at that price overnight, it still makes you wonder how realistic it is to match the performance of these simulated trades in real time trading.