Pair Trading Strategy Journal

Quote from neospecialist:

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.
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Pair Trader does not have a buy signal at the present
time. This will happen often when a spike in price will trigger
a signal then the signal is removed when the price corrects.
I would think that when placing the trade if the prices don't
agree, ..that would be a warning.:confused:
cheers
john
 
It looks like Yahoo has a problem with quotes for RY. It still shows the 46.11 for the previous close as well as for last trade. Shows no volume for today nor any updated prices.
 
Quote from bentedges:

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.
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good point on XLK-XLY. if you can scalp or swing a profit and be hedged, especially with inherently diversified ETFs, even if they have no sector correlation beyond generally moving with the markets, work it as long as it works.

not sure if you were but no offense meant on my statement regarding little attention given to fundamentals on this thread which comes from earlier posts where outside of news, the OP said he was not considering fundamentals and to his credit, has done incredibly well without them.
besides, there are infinite ways to determine which stats to weigh and how much to determine a bias on such.

take HON-NOC, if you count a standard profitability stat like ROE, HON is 23% and NOC is -8% but NOC has a better PEG and P/B, both ok on FCFE, so...who knows.

check out the pair of GE-HON which traded in an 11 point range for 3 years ending in 2006. since then, the pair has maintained a GE long bias regarding P/E, P/B, ROE and still dropped 70+ points with a 2.5 to 1 ratio in a couple of years.

a lot of it seems to be news related or perhaps being a media darling, like WMT running out 50 points from TGT in late 2007 to late 2008. from the performance of the 2 i recommended yesterday, ATI-RTI and BMS-SEE, i have a knack for getting in too early. then again, i am also willing to add to it and wait a long, long time as long as I believe in the fundamentals. usually works, sometimes doesn't.

perhaps best for me, i should just wait to pick up the lucrative nuts found on here and PTF like systems as they work very well for short term plays:)

either way, happy trading.
 
Quote from colonelangus:

good point on XLK-XLY. if you can scalp or swing a profit and be hedged, especially with inherently diversified ETFs, even if they have no sector correlation beyond generally moving with the markets, work it as long as it works.

not sure if you were but no offense meant on my statement regarding little attention given to fundamentals on this thread which comes from earlier posts where outside of news, the OP said he was not considering fundamentals and to his credit, has done incredibly well without them.
besides, there are infinite ways to determine which stats to weigh and how much to determine a bias on such.

take HON-NOC, if you count a standard profitability stat like ROE, HON is 23% and NOC is -8% but NOC has a better PEG and P/B, both ok on FCFE, so...who knows.

check out the pair of GE-HON which traded in an 11 point range for 3 years ending in 2006. since then, the pair has maintained a GE long bias regarding P/E, P/B, ROE and still dropped 70+ points with a 2.5 to 1 ratio in a couple of years.

a lot of it seems to be news related or perhaps being a media darling, like WMT running out 50 points from TGT in late 2007 to late 2008. from the performance of the 2 i recommended yesterday, ATI-RTI and BMS-SEE, i have a knack for getting in too early. then again, i am also willing to add to it and wait a long, long time as long as I believe in the fundamentals. usually works, sometimes doesn't.

perhaps best for me, i should just wait to pick up the lucrative nuts found on here and PTF like systems as they work very well for short term plays:)

either way, happy trading.
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Oh, no there was no offense and the comment on fundamentals wasn't directed at anyone. Just something I am always cognizant of as I like to be on the same side of the undervalued stock, and usually like the smaller cap as well because of the growth characteristics and potential takeovers. That said, I do best when I play the big cyclicals, or so it seems.

On the ATI/RTI, I think it will work for you, but I decided against it because RTI is reporting on Tuesday morning. I don't usually like to get in front of those events, even as that may be the catalyst that gets the pair going in your favor. Also, it makes me a tad nervous with it being a small cap and there having been mentions of a potential buyout candidate.

One that I just put on the sheets just a bit ago is long CSX, short CNI. I play this one quite frequently. This week the ratio has dropped over 7.5%, and I think it works. I may be a tad early, but I have some room to add layers.
 
With regards WHR-MAS, I'd argue that they are a good discretionary pair because they are both exposed to the same end drivers, ie US housing spending.

Earlier on, somebody asked about the issue of discretionary versus statistical based appoaches and, I think its interesting because there isn't a universal answer. You just have to do 'what works for you'. I prefer an approach loaded towards the discretionary side because I have more confidence in regression when the pair starts to move away from you.

You could find a chart that looks like the coastline of Miami but it doesnt mean that the chart will continue to go along that way, however if the market is recognising that, say MAS has good/bad prospects and overbuys/oversells it than you can expect/hope that it will catch up with WHR in time. Relative evaluation is a key part of analyst and fund manager calls. If they like the sector, and note the correlation betwixt your 'paired' stocks than why would they buy/sell the outlier. I think this is the principle of pair trading.

However, there is a caveat! I think it worth pointing out that you can find statistically correlated pairs (but not very good discretionary ones) which work. For example, BDX-BCR has been mentioned before. I dont think this is a good discretionary pair BUT it is likely that they will both trade off sentiment towards the healthcare sector (use a healthcare ETF or a synthetic bundle of stocks as a proxy) , therefore, when you get a signal from the 'pair' (BDX+BCR) it could be just that one (say BDX) is statistically out of sync and so the pair trade is actually just a way of playing BDX against this index (coz BCR is following the index nicely etc).

Someone mentioned index arbitrage earlier and creating synthetic bundles, and I think its a very good idea.
 
Quote from bentedges:

Oh, no there was no offense and the comment on fundamentals wasn't directed at anyone. Just something I am always cognizant of as I like to be on the same side of the undervalued stock, and usually like the smaller cap as well because of the growth characteristics and potential takeovers. That said, I do best when I play the big cyclicals, or so it seems.

On the ATI/RTI, I think it will work for you, but I decided against it because RTI is reporting on Tuesday morning. I don't usually like to get in front of those events, even as that may be the catalyst that gets the pair going in your favor. Also, it makes me a tad nervous with it being a small cap and there having been mentions of a potential buyout candidate.

One that I just put on the sheets just a bit ago is long CSX, short CNI. I play this one quite frequently. This week the ratio has dropped over 7.5%, and I think it works. I may be a tad early, but I have some room to add layers.
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yeah man, on the ones where the fundamentals are unfavorable, i only get in with 25% of the usual size (particularly the uber nervewracking market cap one in an industry where M&A is more common). just look at RTI's P/B, its assets are worth more than its current price.
oh, i guess you did, which is why you passed on it :)
yes, 9 out of 10 times, the smaller cap will get bought out (though did get burned with Hilton a couple of years back). since, i have heard the Marriott rumors at least a few times, which always gives rise to grumblings in the descending colon.

i usually just grin and bear it through earnings season and it seems to have worked out in my favor, all in all, over time but should probably be out beforehand as there is no edge in guessing what will come out. again, sometimes works and sometimes not. just let it stretch out for a few days on subsequent upgrades/downgrades, etc. before getting in.

i have had good luck with BNI-NSC but will definitely check out CNI-CSX over the weekend.

have a great one.
 
Quote from colonelangus:

......oh, i guess you did, which is why you passed on it :)
yes, 9 out of 10 times, the smaller cap will get bought out (though did get burned with Hilton a couple of years back). since, i have heard the Marriott rumors at least a few times, which always gives rise to grumblings in the descending colon.
......
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Do any of you spread trade futures as well. That eliminates the possibility of one of your pairs getting "bought out".

Any thoughts on spread trading futures...?


TIA
 
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