Pair Trading Strategy Journal

Quote from coreed:

Nice to see you back Jonny- You have been missed

OK new trade - Asset Man.

Sold AB @ 27.44
Bought OZM @ 13.23

What I like about trade:

At Layer 2( =2.5 SDs as per my PTF parameters)
Non-trending Ratio chart
% -> Mean at near term historic levels
Pair has good history of profitability.

What I don't like:

Corr. chart reading is low (56%)
Corr chart recent action pointing down.

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Reason I include +/- for trade is as a rule there will always be something about a trade/chart you don't like. It is rare that all your ducks will be in a row, and they don't need to be to come up with profitable trades.
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coreed, I almost jumped into this trade but I see a couple of potential issues caused by dividends.

For AB it looks like you will have to pay a .62/share dividend if you are still short on 2/18 and OZM is ex-div today so when you factor out it's price change from the it's .56/share dividend it is actually up today.

I might be looking at this incorrectly but unless this is a 1-2 trade this might not be a good pair.
 
Quote from BD1:



I might be looking at this incorrectly but unless this is a 1-2 trade this might not be a good pair.
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Meant to say this 1-2 day trade.....close out before you have to pay dividend.....
 
Thanks for the feedback BD1.

Dividends are not something I filter for, but will probably start looking to add as a filter. Until now, I have learnt the stock was ex-div only when I go and check my closed trade P&L. Over time the +/-tend to even out, but it is something I should be aware of nonetheless, and the info is already there on the earnings.com page, so why not look at it?

Thanks for the heads up.
 
You are correct, the dividends do tend to even out over time.

At first I didn't pay attention to them but now I check them (in particular short side) along with earnings release dates before placing trade. If it is a small div then I might just go ahead but the larger divs obviously create a bigger hurdle to the trade's p&l unless the long has a similar div in the same time period. I now just do a quick calc on div. cost.

Again, just stating the obvious but I have added a div calc check in my personal trading rules.

Good luck.
 
Quote from BD1

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Hello, I would like to get some input on what you do with analyst upgrades/downgrades.

Here is what I am doing but always looking to improve:

1. If a trade is triggered and the only news is an upgrade/downgrade I typically do not trade but I am wondering if I should be trading these triggers? If I do trade I will wait till the end of the day because the upgrades/downgraded stock tends to trend up(down) based on the upgrade. Then if everything else with the pair looks very good and it seems like the market overreacted then I will place this trade. But this is probably less than 20% to the time.

2. If the pair trade is open I get an upgrade/downgrade that is unfavorable to my long/short stock then it depends:

- If the trade is open for 8+ days and it is trending away from the ratio then I will probably just close it out right away and take my loss before it grows. I have a 10-12 trading day stop loss on my pairs.

- If the reason for the upgrade/downgrade is a big news event and it is going to negative to my position then I will likely close it out.

- If it is a top shelf analyst like Goldman then I pay more attention to the upgrade/downgrade

- If it is early in the trade and a more 'normal' upgrade/downgrade then I will just ride it out.

Reactions? What do other do? I would like to be as mechanical as possible with my trading rules but this area seems to require more subjective analysis.

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BD1, I think your strategy makes sense.

Up/Downgrades cannot be filtered as they are unannounced.

The only thing you can do is filter signal from the noise.

Major houses broker ratings will give a stock legs - particularly to the upside I have noticed. Barclay's chip analyst upgraded AMD last summer, and the thing just kept going as momentum players got hold of it. I was short - I remember.

Your reaction to unexpected events like this shld be part of your trading plan. Do you have a predetermined exit point based on % loss for the pair? This wld in a way give the mechanical element you refer to. I am looking at a rule that states:

"Position will be closed if one leg of pair loses => 8.5% unless other leg's profit => 8.5%"

There is nothing magical about 8.5%, it is just a cut-off point.

BTW, does a service exist in N.America for up/downgrade notifications?
A service by digitallook.com will e-mail a page for all the changed broker ratings for all UK companies .For free. V. useful.

If anybody knows of a similar service for the US market, let me know.
 
I would recommend using something like average true range or a one or two or X sigma trigger instead of a percentage figure or volatility variable - much more proactive without the pain induced by latency. Remember, you can always get back into the market.

You may disagree, but it works for me (why am I rhyming this morning?).
 
Quote from coreed:


BTW, does a service exist in N.America for up/downgrade notifications?
A service by digitallook.com will e-mail a page for all the changed broker ratings for all UK companies .For free. V. useful.

If anybody knows of a similar service for the US market, let me know. [/B]
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Briefing.com has upgrades/downgrades and I signed up for their email updates. Their morning update includes this list.

I also check the news on each one of my pairs before the market opens. This quickly gives me any up/downgrades but also any other news that could impact the position. I use the thinkorswim thinkdesk platform (I have accounts at both tos and TD ameritrade).
 
Low volume environment is more conducive to scalping, right now one is better of scalping one or two pairs than having tens of pairs out there.
 
Sold FFIN @ 55.22 (2.17%)
Covered FHN 12.95 (1.75%)

Typo from P.304 reads bought 'Bought FFIN @ 55.11' -
It should have read 51.11

2 trades 2 wins so far.

Other open trades posted here are not looking so pretty though.

:mad:
 
Sold MA @ 221.75 (1.09)
Covered V @ 86 (-5.22)

3 x Closed trades on this thread:

2 wins
1 Loss

Only posting US trades to forum.

'Mistake' with this trade was focusing on Layer 3 signal( 3 x SDs)
and choosing to disregard the fact that the pair was earnings driven.
The pair stretched some more, even tho' it was at 3 x SDs.

Often find that best looking charts appear after earnings are released. I find it hard NOT to pull the trigger on these trades.
Filters are not to guarantee big wins, but to hopefully avoid big losses.

Learning still I guess.
 
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