Pair Trading Strategy Journal
- Thread starter jonnysharp
- Start date
Thank you for your input. I think it makes sense to have a maximal number of open trades as long as the risk to the account is sensible. For me, I am not prepared to reduce my size as I feel any smaller would not be worth my while (I will openly admit that I am only doing $2000 per side). For now I will wait for good fills in my main holding and only then look to increase number of trades and size. I will also use realised profits from the pairs to increase my size as and when I am able to. It is frustrating because my account size warrants much higher per side but I am unable to close my whole main equity holding as capital gains tax is too expensive, I would much rather commit the capital to pairs!
Was just wondering, when people pair trade (specifically using Pair Trade finder), is it generally acceptable within the strategy that stocks can be more than 15% 'offside'. For example I have shorted TCK:NYQ at 49.2356 (avg) and it currently trades at 56.87, approx 15% higher. Is it the case that I am not doing enough work into pre-empting such moves or is this natural within the strategy?
On a side note I have traded TCK against long BHP which I am currently only 8% up on so my current unrealised loss is running at 7.344% of one side & the pair ratio is sitting 2.4 std devs below its mean (I entered around 2 std devs below the mean). Just asking these Q's to get input into the way I am trading to see if those with experience may suggest better ways to do things. thanks folks
On a side note I have traded TCK against long BHP which I am currently only 8% up on so my current unrealised loss is running at 7.344% of one side & the pair ratio is sitting 2.4 std devs below its mean (I entered around 2 std devs below the mean). Just asking these Q's to get input into the way I am trading to see if those with experience may suggest better ways to do things. thanks folks
Quote from Steven.Davis:
Looking at the chart:
I see IBM has been trending higher. SAP, starting 10/27 has been trending lower. In at least recent memory, the two stocks track well. Their displacements have resolved in 2-3 months. The current displacement shows no signs of abating. I am not a fan of trading dispersions, but the Z-score could go from the current 2.21 out to 3. If it gets to 4, I would reexamine the fundamentals to see if this displacement represents a game changer.
The current displacement looks similar to the May situation. If the displacement breaks with SAP climbing towards IBM, one could enter a reversion trade with an expectation of 1 ½ months to complete. My back testing found that it is best to take a reversion profit just before they hit parody (say Z-Score 0.1) since often there is some bouncing around zero.
My 2-cents.
HI, curious where did you find that chart...?
Thanks
Nick
mpat89,
I would believe this is quite a normal thing when the ratio continues to diverge until the trend reverses (which will happen sooner or later).
I would be entering into a trade only when the mean trend. Also, if I notice that, while ratio is moving back to the mean, the actual unrealised PnL on the trade decreases (this might be because one of the stocks is moving in wrong direction much faster, then another), I would exit the trade well before the ratio is back at 1.0/-1.0 and reduce my losses. Another thing - is when l see that PnL moves into my favour, I would continue keeping the pair till I see the reversion.
In fact, I do think that the only thing where PTF is good is that it helps you to select the best pairs and also it gives signal when the ratio is diverging from the mean too much.
In fact, I believe that backtester in PTF could be better.
First of all, there is no way to tell backtester that I would like trends to be highly correlated before entering the trade. Secondly, I would like backtester to identify and tell me the best average entry/exit stdev points for EACH pair.
My self-written Java app which I put together over the weekend backtests 3000 pairs in 2 mins (using the same Yahoo Fianance EOD data) while running over 20 1-year backtests on each trade (to identify the most profitable range) as well as taking correlation into account, while it takes ages to back test the same universe in PTF - it took me the whole weekend to backtest the NYSE & Nasdaq industries. Also, I have a times better control/options on the pairs selected, also PTF doesn't support diverging pairs while my tool does.
I am thinking on automating the entrance/exit strategy by numerically analysing ratio/correlation charts in line with Johnny's and Jared's recommendations and also I thinking on refreshing my pairs at least once a week from the backtest.
I would believe this is quite a normal thing when the ratio continues to diverge until the trend reverses (which will happen sooner or later).
I would be entering into a trade only when the mean trend. Also, if I notice that, while ratio is moving back to the mean, the actual unrealised PnL on the trade decreases (this might be because one of the stocks is moving in wrong direction much faster, then another), I would exit the trade well before the ratio is back at 1.0/-1.0 and reduce my losses. Another thing - is when l see that PnL moves into my favour, I would continue keeping the pair till I see the reversion.
In fact, I do think that the only thing where PTF is good is that it helps you to select the best pairs and also it gives signal when the ratio is diverging from the mean too much.
In fact, I believe that backtester in PTF could be better.
First of all, there is no way to tell backtester that I would like trends to be highly correlated before entering the trade. Secondly, I would like backtester to identify and tell me the best average entry/exit stdev points for EACH pair.
My self-written Java app which I put together over the weekend backtests 3000 pairs in 2 mins (using the same Yahoo Fianance EOD data) while running over 20 1-year backtests on each trade (to identify the most profitable range) as well as taking correlation into account, while it takes ages to back test the same universe in PTF - it took me the whole weekend to backtest the NYSE & Nasdaq industries. Also, I have a times better control/options on the pairs selected, also PTF doesn't support diverging pairs while my tool does.
I am thinking on automating the entrance/exit strategy by numerically analysing ratio/correlation charts in line with Johnny's and Jared's recommendations and also I thinking on refreshing my pairs at least once a week from the backtest.
No doubt like many others you received an email from PTF telling you about the new FX Pairs Trading System using an EA for Metatrader.
The first 250 EAs would be free.
Although I had my doubts about the possibility of being able to trade FX profitably using stat arb techniques I was intrigued enough to go through the process of getting hold of a free copy.
It quickly became apparent that in order to get the EA you had to sign up for a new account with Assobid, a company I've never heard of.
While I'm sure Jarred is a nice enough bloke, its very obvious what is going on here and frankly I'm not buying into that sort of sales technique.
Like all those others in the MT4 FX EA flogging scene, the one obvious question is, if your EA is so good, why flog it ? There really isnt an answer to that.
MT4 has a very bad reputation and is known to be a completely bent platform with all manner of nasty stuff going on in the background with brokers spiking out traders, closing positions randomly and generally stealing money willy nilly (see www.forexpeacearmy.com).
The FX market is very poorly regulated, if at all and my own view is that this offer should be left well alone.
Those that take up the 'free' offer, best of luck but this has totally changed my attitude to Jared and his company (though PTF is still working well for me).
The first 250 EAs would be free.
Although I had my doubts about the possibility of being able to trade FX profitably using stat arb techniques I was intrigued enough to go through the process of getting hold of a free copy.
It quickly became apparent that in order to get the EA you had to sign up for a new account with Assobid, a company I've never heard of.
While I'm sure Jarred is a nice enough bloke, its very obvious what is going on here and frankly I'm not buying into that sort of sales technique.
Like all those others in the MT4 FX EA flogging scene, the one obvious question is, if your EA is so good, why flog it ? There really isnt an answer to that.
MT4 has a very bad reputation and is known to be a completely bent platform with all manner of nasty stuff going on in the background with brokers spiking out traders, closing positions randomly and generally stealing money willy nilly (see www.forexpeacearmy.com).
The FX market is very poorly regulated, if at all and my own view is that this offer should be left well alone.
Those that take up the 'free' offer, best of luck but this has totally changed my attitude to Jared and his company (though PTF is still working well for me).
I'm going to give it a try. PTF has been good to me and I've been looking for an excuse to switch from Oanda's shananigans anyway.
As for the broker Askobid - there have been some decent reviews(although ET doesn't list them yet). I have opened up at least six different trading accounts and this is the first time that someone (a sweet Aussie lady in Canada on behalf of a Cypriot based company) called me to help with the start up process. These guys mean business.
I've had no experience w/MT4 and this will be my first launch into the robot autotrading world so we shall see.
As for the broker Askobid - there have been some decent reviews(although ET doesn't list them yet). I have opened up at least six different trading accounts and this is the first time that someone (a sweet Aussie lady in Canada on behalf of a Cypriot based company) called me to help with the start up process. These guys mean business.
I've had no experience w/MT4 and this will be my first launch into the robot autotrading world so we shall see.
Best of luck Afto. Keep us informed.
Do keep in the back of your mind what I said before. If this EA could make money, and bearing in mind the FX market is, to all intent and purpose, limitless, why doesn't Jared simply use it himself, rather than 'play' with it as he did in the log shown on the site ?
Also ask yourself why this is being given away ? The answer must be that Jared is getting a kick-back from Assobid. Nothing wrong with that in principle but the next question is, 'why would a broker give a kickback if it wasn't to his advantage ?'. Assobid dont charge a commission and if they hedge all their positions (which is doubtful as they probably bet against the trader, like most MT4 brokers) then how do they make their money ? On the difference in spread ? Pull the other one. We know exactly how MT4 brokers make their money (with the notable exception of MB Trading who charge a commission).
A short while back an insider spilt the beans about MT4 and documents were published that proved how bent it was and how it was designed with the capability for brokers to spike out traders and send different prices to different clients with the aim of knocking out stops.
Its a great shame Jared has gone down this route as it hasn't done his credibility any good whatsoever.
Do keep in the back of your mind what I said before. If this EA could make money, and bearing in mind the FX market is, to all intent and purpose, limitless, why doesn't Jared simply use it himself, rather than 'play' with it as he did in the log shown on the site ?
Also ask yourself why this is being given away ? The answer must be that Jared is getting a kick-back from Assobid. Nothing wrong with that in principle but the next question is, 'why would a broker give a kickback if it wasn't to his advantage ?'. Assobid dont charge a commission and if they hedge all their positions (which is doubtful as they probably bet against the trader, like most MT4 brokers) then how do they make their money ? On the difference in spread ? Pull the other one. We know exactly how MT4 brokers make their money (with the notable exception of MB Trading who charge a commission).
A short while back an insider spilt the beans about MT4 and documents were published that proved how bent it was and how it was designed with the capability for brokers to spike out traders and send different prices to different clients with the aim of knocking out stops.
Its a great shame Jared has gone down this route as it hasn't done his credibility any good whatsoever.