Pair Trading Strategy Journal

MA / V has nice correlation and really got out of wack over the last few days. Might be worth checking out if you haven't.

also, this may have already been mentioned on the thread but there is some pair trading strategy info as well as weekly videos on thinkorswim web site where one of their guys records his weekly hourly show on pair trading.

i watched one last night. didn't learn much but probably worth a look.
 
Thanks for the heads up mlsignups. This pair has been off my radar for some time. It must have been that the per trade profitability was < 300 when b.tested in PTF.

I usually avoid the obvious pairs KO/PRP, HD/LOW, XOM/CVR for that reason. However, MA/V is so out of whack that even with earnings driving this, it will revert, so am taking the trade.

Sold V @ 81.73
Bought MA @ 219.35
 

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Made some small gains this past couple of weeks (with the exception of NOK v QQQQ which gained an extraordinary 5.3% in one day) on DELL v QQQQ and ERTS v QQQQ. Also joined twitter & stocktwits where I posted my live calls - I wanted to check with other traders, in your experiences has it been better to trade QQQQ against a heavily undervalued stock as opposed to raw stock v stock. Example, last post recommends Visa v Mastercard which looks very logical right now, but how about shorting QQQQ v Mastercard? My rationale for this is to remove as much of the boardroom risk as possible... any thoughts/input invited :)
 
Well done with the NOK v QQQQ trade.

My results of trading Stock v an ETF Benchmark have been somewhat flat.

I base this on trading UK ETF/Stock ( I am based in EUR.)

e.g.

ISF.L/GSK.L (.73%)
ISF.L/IHG.L (1.39%)

Although ISF is the highly liquid FTSE-100 index ETF, ETFs have not taken off over here in the same way as N.America. So there are less heavily traded products to choose from.

I tend to pair LSE traded Investment Trusts(Investment Trusts are basically exchange trades mutual funds)

eg. JII.L/HFEL.L

Here, the performance is better if you can get in at the right price.
Bid/Ask spreads tend to be higher than in US, so you really need L2
 
I have found trading an ETF (such as QQQQ) vs Stock works best when the stock 'universe' is narrowed down to a focal group of stocks - for instance I am making it my business to know every one of the Nasdaq 100 stocks using various sources - both technical (charting sites, scanners, technical ratings/rankings etc) and fundamental without making it complicated...

For fundamental information, I have Bloomberg Mobile (free) downloaded on my blackberry and check every few hours for 'News' under 'Technology'. This works well and provides a trigger for 'idea exploration' - recent example: "Windows 7" got some rave reviews versus Apple Leopard OSX, sales were looking positive for Windows based PC's. I looked at HPQ and DELL - the latter looked heavily oversold based purely on technicals. So here I have a well balanced (technical and fundamental based) window of opportunity...

How to trade it... Go long $150k DELL versus $150k QQQQ, making a dollar neutral natural hedge trade. The rationale: Although risking a relatively flat differential (I am not expecting to see double digit gains on this) between DELL and QQQQ I am convinced over the next 6-10 working days, DELL will outperform QQQQ and I have my trade running in profit (still open) at present.

Another idea which struck me was to go Short SMCI which competes with DELL on the rack mount and blade server solutions markets. SMCI looked overbought, hence would have been a good trade, but I am shying away from stock vs stock, preferring the simplicity of QQQQ vs Nasdaq 100 Stock.

In my experience I have never found much success - nothing to write home about - when I stick to purely mechanical/technical methods, OR purely fundamental. Rather, I find reward in getting a good balance - the way to do this 'practically' is to focus on a group or sector and get to know (over time of course) as much as you can about each company/business. The fundamental trends of a business are essential, and when combined with technicals, provide the firing power for profitable trades (in my experience)...

When this is further applied to a proper risk-astute strategy such as pairs trading an ETF vs Stock (as opposed to stock vs stock) I have found the payoff to be consistently positive...
 
Sold WFSL @ 18.98
Bought FULT @ 8.44

What I like about trade:

Non-Trending Ratio chart
% -> Mean at historic level
Pair has good history of reverting back to Mean from this level.
Corr. chart is flat to trending up slightly
Corr is at high level(84%)

What I don't:

50d spread is not at extreme.
Banks/Financials are still volatile (Although have filtered trade for earnings)
 

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Went LONG MA on Friday pre-close, but not against V (instead shorted QQQQ - prefer trading stock vs ETF - see my last post) - MA is moving up/regaining strength as expected - single day net 2.65% gain (MA up 2.79% minus QQQQ up 0.14%)...

Will take half off the table to capitalize on adding position to DELL (also up against QQQQ)... DELL has shown strong support at $13 forming a strong technical basis for medium term rally.

DELL fundamentals also strong with positive Windows 7 uptake, a relatively low P/E and expansion into emerging markets (living in Dubai/traveling to the Far East fairly regularly, I am seeing this first-hand)... Will exit the pair if DWLL dips below $12.85...
 
Interesting Shiraz. And your pair is beating MA v V which is up 80 bspts as of today's close, since opening position Fri.

I would have thought MA v SPY would have been a more logical choice, or is QQQQ your default benchmark ETF for all pairs?
 
I have found that QQQQ trades in close correlation to SPY, so the choice becomes merely academic. There is a very interesting article on this (strictly trading QQQQ v DIA or SPY) at the link below which returns consistent annual returns...

http://www.wilmott.com/messageview.cfm?catid=38&threadid=71064

Going back to my MQ/QQQQ trade, I was already long ERTS vs QQQQ, and closed ERTS at a good profit (I still feel ERTS has good upside both technically and especially from a fundamental point of view - the traditional gamers on box-consoles (wii, ps3 and xbox in particular) remain die-hard and the trend in this market is up). Rather than close the QQQQ leg to run a MA/QQQQ pair-trade, I kept the short QQQQ open - hope this makes sense - I think I could have written that better:)...

One can stay permanently short the QQQQ, and continually look for stocks within the Nasdaq 100 (or high volume/liquid picks from S&P) which become technically oversold with moderate-strong fundamentals. For instance, I am 200k short QQQQ (without margin) and always long 2-3 stocks which I find relatively undervalued to QQQQ, which all add up to 200k, hence maintaining a dollar-neutral position, and saving on broker fees (although this would only demand a $9.95 brokerage on aapprox 5,000 lot QQQQ)....
 
Trading discipline can mean many things.

For me right now in earnings season, it is restraining from taking trades where there is a perfect set up based on my criteria. Saw at least 2 today. However, all have pending earnings.

Although riskier than a 'non-news' trade, I don't mind taking a position after a news release, depending on how much I feel the news is already in the price.

SRA Q4 EPS release was higher than street estimates and they also issued positive guidance.

Sold SRX @ 18.21
Bought SAP @ 43.84
 

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