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Pair Trading Strategy Journal
- Thread starter jonnysharp
- Start date
Quote from 4XQs:
If one leg is a lot more volatile than the other, I would be surprised to see the pair correlated at all!?
I have to disagree... Imagine stock ABC always moves exactly 2 x in the same direction as stock XYZ. The correlation of these two stocks is 1.00 (i.e. perfect correlation) yet volatility is double.
That being said, IV is probably the one to watch. I wouldn't mind piggy backing Market makers complex volatility algo's to help improve my own trading. I guess implied volatility is much more relative than historical
Just added a layer to my CHL:VOD position.
Quote from total_keops:
Just added a layer to my CHL:VOD position.
A lot of China Mobile pairs are way out of wack. I'm concerned about the uncertainty of the stock. There seems to be news about some difficulty with competitive technology, and that would influence only China Mobile, as indicated by the large number of pairs with distorted charts, all with CHL as one side of the pair. I'm uncertain about what the cards hold, short term. Long term, my guess is that China Mobile should be strong.
I'll wait until I see the pairs show a persistent shift in my favor. I decided it was safer to stay away, for now.
Walt B
Hi Keops,
I don't want you think I didn't see or appreciate your help with this. It was more than I wanted to tackle at the time you posted, and now I have more time. I'm working on it today. Looks great. I will have to understand macros in Excel, then API's. Never ending learning curve!
I also note by the number of downloads that many others are interested.
Thanks for making this for me, and the others.
Walt B
I don't want you think I didn't see or appreciate your help with this. It was more than I wanted to tackle at the time you posted, and now I have more time. I'm working on it today. Looks great. I will have to understand macros in Excel, then API's. Never ending learning curve!
I also note by the number of downloads that many others are interested.
Thanks for making this for me, and the others.
Walt B
Quote from total_keops:
Walt, you can use the IB Excel API. I made a sample for you.
1- Install the API component from IB website.
http://www.interactivebrokers.com/en/p.php?f=programInterface&ib_entity=llc
2- Enable API in TWS: DDE for Excel/Configure the Application to Support API Components
http://www.interactivebrokers.com/php/apiUsersGuide/apiguide.htm
3- In Excel, change Tools/Macro/Security to medium.
4- Start TWS.
5- Open the spreadsheet and follow the instructions.
In the same folder as the spreadsheet, put an sound file called "Chime Down.wav" or PM me your email so I send it to you cuz I dont think I can attach it here.
This can only give you an audible alert, no emails. From what I look in Google it seems doable but I dont have this feat.
If you fail and have questions ask here so I dont repeat 50 times and other can benefit also.
Hey Guys,
I've noticed in my trading that there are a couple of scenarios when a pair get > 2 SD from their mean. Either they both diverge from each other, indicating that one symbol is trending against the market average, and the other is trending with it. We enter here hoping each symbol reverses it's direction, profiting from both sides, or that one side was incorrectly priced, and it will snap back in line with the direction of the other leg.
The next scenario is that one stock goes way outta whack for reasons of either news or rumour. Perhaps this is a trade to skip, for there may be fundamental reasons for the shift, something we short term pair traders want to avoid.
The other is both move in the same market direction, but one moves a little faster than the other, and the theory is that it will reverse, or the other will catch up to it.
The second reason, I have seen, has many critics, and I also tend to shy away from news related jumps. I trade both of the others, and I was wondering if anyone has any kind of info on whether in real life, perhaps that point 3 is an invalid trade entry criteria.
My thinking is that if you enter into a pair trade because the SD is >2 simply because one leg is outta wack, then it isn't really a pair trade. It's just a trend reversion trade, with another stock used in place of a stop loss. A better stop loss in this scenario might just be a trailing stop, or even a hedge with an index.
In thinking about it, the best pair trade is one where stock A trends below index performance, and stock B is trending above. This should also mitigate losses - chances are if your wrong on one, you might be right on the other.
Does anyone wrap their trading rules around these ideas, and like to comment?
Adrian
I've noticed in my trading that there are a couple of scenarios when a pair get > 2 SD from their mean. Either they both diverge from each other, indicating that one symbol is trending against the market average, and the other is trending with it. We enter here hoping each symbol reverses it's direction, profiting from both sides, or that one side was incorrectly priced, and it will snap back in line with the direction of the other leg.
The next scenario is that one stock goes way outta whack for reasons of either news or rumour. Perhaps this is a trade to skip, for there may be fundamental reasons for the shift, something we short term pair traders want to avoid.
The other is both move in the same market direction, but one moves a little faster than the other, and the theory is that it will reverse, or the other will catch up to it.
The second reason, I have seen, has many critics, and I also tend to shy away from news related jumps. I trade both of the others, and I was wondering if anyone has any kind of info on whether in real life, perhaps that point 3 is an invalid trade entry criteria.
My thinking is that if you enter into a pair trade because the SD is >2 simply because one leg is outta wack, then it isn't really a pair trade. It's just a trend reversion trade, with another stock used in place of a stop loss. A better stop loss in this scenario might just be a trailing stop, or even a hedge with an index.
In thinking about it, the best pair trade is one where stock A trends below index performance, and stock B is trending above. This should also mitigate losses - chances are if your wrong on one, you might be right on the other.
Does anyone wrap their trading rules around these ideas, and like to comment?
Adrian
Quote from cipherscribe:
In thinking about it, the best pair trade is one where stock A trends below index performance, and stock B is trending above. This should also mitigate losses - chances are if your wrong on one, you might be right on the other.
Does anyone wrap their trading rules around these ideas, and like to comment?
Adrian
Yeah good point. Keen to hear opinions on this. Jared made this post on another forum which goes in line with what your saying:
"I have every stock in the ASX100 paired with the ^AXJO which is the ASX200 cash index, periodically throughout the day I will rank by the +/- column and look for stocks that are -2 or +2 against the index, if I find 2 stocks where one is overbought and the other oversold and they are in the same sector il backtest them to see if the pair history is profitable and if so pair them up and make a trade, a like this situation because both stocks are out of whack with the market and generally when you pair them together the +/- is above/below 2.50, in JHX/TOL case it is 2.83, the best trade you can have is when a pair is more than 3stdev from its mean on no news."
Specific trade ideas have been a bit thin on the ground recently, so I thought I'd mention a few
MCHP/INTC
PII/HOG in play
watching SPN/BJS
MCHP/INTC
PII/HOG in play
watching SPN/BJS