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Pair Trading Strategy Journal
- Thread starter jonnysharp
- Start date
Here is one way I am using the new ratio charting in thinkorswim thinkdesk (td ameritrade). This chart shows a trade I was in last week. CAT/TEX. In the chart I added a 14 day MA study (on a 1 minute basis). This is the blue line. Then I draw a trendline on the chart so I can see MA trend over the next day or so.
As a ratio approaches the MA trendline I then look out a day to see where the profit (or loss) will be by the end of the next trading day. I also calculate the $ I am away from the MA ratio. If the current position is close to where I would be the next day then I might close out the trade early and lock in my P&L vs waiting to see what happens the next day and avoid a reversal.
I am much more likely to do this if I am 8-10 days into the trade vs 1-2 days, since the probability of a profitable trade drops over time.
I try to be mostly mechanical with my trade rules but I do use some subjectivity here. The new ratio charts help as I was doing this all manually before.
As a ratio approaches the MA trendline I then look out a day to see where the profit (or loss) will be by the end of the next trading day. I also calculate the $ I am away from the MA ratio. If the current position is close to where I would be the next day then I might close out the trade early and lock in my P&L vs waiting to see what happens the next day and avoid a reversal.
I am much more likely to do this if I am 8-10 days into the trade vs 1-2 days, since the probability of a profitable trade drops over time.
I try to be mostly mechanical with my trade rules but I do use some subjectivity here. The new ratio charts help as I was doing this all manually before.
Attachments
Quote from waltbx:
Interesting. Thanks.
Tell more about your tools, please. How do you determine statistical variance? How do you determine if a stock is news driven?
Fundamentals may take a long time to take hold, and my pairs are swing trades. Are you holding for longer periods?
Walt B
I use a few different tools. Excel, Wealthlab and eSignal. I am simply looking for pairs that are relatively highly correlated (and that make sense that they are correlated, such as in the same industry) and then looking for a divergence from the mean. I understand cointegration is an important tool, but quite frankly, I'm not smart enough to program it or use it. As for determining if a stock is news-driven, I simply go back and look thru all the recent news for a pair to see what may have gotten a pair out of whack. If it were an upgrade/downgrade of one component of the pair, I am looking to trade it. If it is an accounting issue, potential takeover, severe earnings revision, etc, I am staying away from it.
I typically do not hold pairs for long periods of time. It is rare that I hold them longer than two weeks; in most cases, it ranges from a day to several days. The fundamental bias is simply something that I lean on as the 'big' money is looking at it, as well. Of course, there is always the possibility that I am wrong on that part of the analysis, as well.
Lastly, I do try to stay in large, liquid stocks (with the occasional exception.) Yes, I realize there may be more opportunity in smallcap, under-followed issues, but trying to get in and out of many of these stocks that have a .06 - .10 spread on them isn't my idea of a good time. Plus they are much more easily driven to extremes where the pain can become unbearable.
Thanks, BD1.
I don't see how this differs from the ratio chart in PTF, which also has a MA line? How to you see the TOS chart as being more useful?
Do the Watchlists, Study Sets store pairs?
wb
I don't see how this differs from the ratio chart in PTF, which also has a MA line? How to you see the TOS chart as being more useful?
Do the Watchlists, Study Sets store pairs?
wb
Quote from BD1:
Here is one way I am using the new ratio charting in thinkorswim thinkdesk (td ameritrade). This chart shows a trade I was in last week. CAT/TEX. In the chart I added a 14 day MA study (on a 1 minute basis). This is the blue line. Then I draw a trendline on the chart so I can see MA trend over the next day or so.
As a ratio approaches the MA trendline I then look out a day to see where the profit (or loss) will be by the end of the next trading day. I also calculate the $ I am away from the MA ratio. If the current position is close to where I would be the next day then I might close out the trade early and lock in my P&L vs waiting to see what happens the next day and avoid a reversal.
I am much more likely to do this if I am 8-10 days into the trade vs 1-2 days, since the probability of a profitable trade drops over time.
I try to be mostly mechanical with my trade rules but I do use some subjectivity here. The new ratio charts help as I was doing this all manually before.
Quote from bentedges:
I use a few different tools. Excel, Wealthlab and eSignal. I am simply looking for pairs that are relatively highly correlated (and that make sense that they are correlated, such as in the same industry) and then looking for a divergence from the mean.
Bentedges,
How many pairs are you holding at one time?
One of the premises of Jonny, and PTF, is to make pair trading more mechanical. In and out with less analysis. I'm spending more and more time checking out my potential trades, and not sure that's what I want to do in life. PTF Alerts service provides signals mostly on Ratios diverging from MA, and has good profits. And more trades at one time means I have difficulty tracking all of them. Right now I'm cutting back from 6 pairs to 5 pairs at one time.
Walt B
Quote from waltbx:
Thanks, BD1.
I don't see how this differs from the ratio chart in PTF, which also has a MA line? How to you see the TOS chart as being more useful?
Do the Watchlists, Study Sets store pairs?
wb
waltbx
These charts allow me to the the '1 day look' ahead much more precisely than with PTF. It provides more decimal places which is helpful on some (not all) pairs. I was doing just in PTF but this just makes it easier to visualize. Plus in tos you can quickly change the range of the graph from 1 day to 5 days, 6 months, etc.
Quote from waltbx:
Bentedges,
How many pairs are you holding at one time?
One of the premises of Jonny, and PTF, is to make pair trading more mechanical. In and out with less analysis. I'm spending more and more time checking out my potential trades, and not sure that's what I want to do in life. PTF Alerts service provides signals mostly on Ratios diverging from MA, and has good profits. And more trades at one time means I have difficulty tracking all of them. Right now I'm cutting back from 6 pairs to 5 pairs at one time.
Walt B
Sounds like I am about the same as you, holding anywhere from 0 - 6 pairs. I try to be disciplined and not take potential trades that I deem mediocre; I am not always successful in that task.
I would like to become more automated in the trading, as this will help take the emotion out of things, but haven't figured out how to do so. Would rather be more automated in the POTENTIAL trades, where I can then do the analysis to decide if I wish to take the potential trade.
Quote from bentedges:
A pairs idea that makes sense to me at current levels:
Long PEP, Short KO under 1.029 on the ratio.
I do like PEP:KO I just would wait until that ratio had a positive day to get in, right now is getting stabilized, the fundamentals are in favor of the pair, we'll see !.
I'm checking a couple of pairs using option spreads as somebody here was recomending.
I think it is good idea because it limits your loses if any of the stocks goes againt you, but at the same time it limits your gain also. Any comments please?
Attachments
Magon,Quote from magon:
I do like PEP:KO I just would wait until that ratio had a positive day to get in, right now is getting stabilized, the fundamentals are in favor of the pair, we'll see !.
Your chart shows the RSI (14) of PEP/KO at 26.39, my chart from PTF shows RSI of 33.75, with a lookback of 14 days. Why the difference?
I'd still wait for RSI to drop further. Or show a definite reversal.
WB
Attachments
Quote from waltbx:
Magon,
Your chart shows the RSI (14) of PEP/KO at 26.39, my chart from PTF shows RSI of 33.75, with a lookback of 14 days. Why the difference?
I'd still wait for RSI to drop further. Or show a definite reversal.
WB
That's something that I haven't figured out yet, I have noticed the difference when I takes my picks from PTF and then plotted on stockcharts, (I use this urls on my blackberry to check my pairs).
I don't have a third ratio chart to compare with.
BD1, Are those ration charts at prophet.net on the member's area?