Pair Trading Strategy Journal

Disappointing December retail sales.
COST overpriced in pair; TGT underpriced in pair.
Code: 
                  1/3   1/6    Diff
COST             73.45 70.47  -2.98                                  
TGT              60.97 54.77  -6.20                                  
                                                                                
For $10,000           COST              TGT               Loss                  
Equal # of shares     74.39 shares      74.39 shares      -239.55           
Volatility weight     80.26 shares      67.32 shares      -178.21           
Dollar Neutral        68.07 shares      82.01 shares      -305.59           
Inverse Beta          66.64 shares      83.73 shares      -320.54
 
Quote from afto:

An update on my little experiment w/Jared's EA;
Bottom line - I'm extremely uncomfortable trading when the RR is 1:7 even though the WL rate is 95% so it was probably always going to end like this. The robot traded ten times (5 small profits and 5 breakevens) so obviously this is statistically insignificant therefore you can take from this what you will.
I readjusted the risk parameter from 5% to 1% after the robot first went AWOL. I have no explanation for this although Jared suggests there might have been a loss of connectivity (if so, it would have been measured in nanoseconds or my black ops game fanatic son would have informed me).
Then a couple of days ago I had to manually close a trade as either the robot didn't transmit the TP order or the platform didn't accept/receive it. Either way, this is not exactly the "sitting back in your armchair sipping pina coladas whilst the money flows in" mode that the industry projects.
I've got to admit though that the whole idea of having your very own little robot trading away on your behalf is quite alluring - especially when it regularly racks up profits. However the day that it doesn't will hurt, the second day could seriously injure you and the third day, if it arrives like a London double decker bus, will kill you.
The big advantage of EA's is that the TP and SL levels are not known to the broker/platform. That seems to be why most of them trade with very wide stops. Way too wide for my liking.
Also, since Dr Who's withering criticism of the MT4 platform, I am considering closing my AskoBid account and transferring funds to the devil I know Oanda.
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Afto I dont think you have given the robot a chance. If you had of done some research before hand you would have know that the risk to reward was 1:7 and it had a win rate of 95%. If you were unhappy with this you could have choose not to trade the system . You have completed 10 trades, the backtested results cover 12 years and thousands of trades.
 
Maybe so but there is a difference between knowing and doing and it just didn't work for me. I'm not saying that it wouldn't for anyone else but its always a question of meshing the trading style with your own personality.
In my regular trading I shoot for a minimum 2:1 RR and can handle small losses. To me this was too much like picking up dimes in front of a steamroller.
JMO

Quote from robbo:

Afto I dont think you have given the robot a chance. If you had of done some research before hand you would have know that the risk to reward was 1:7 and it had a win rate of 95%. If you were unhappy with this you could have choose not to trade the system . You have completed 10 trades, the backtested results cover 12 years and thousands of trades.
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ok, who was on the wrong side of the TGT/COST pair
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Got around to looking at the scatter plot for COST/TGT. It doesn't look too cointegrated:
COST_TGT.png


Here are some pairs that I like better.
SCCO vs BHP:
SCCO_BHP.png

BTI vs MO:
BTI_MO.png

DHI vs PHM:
DHI_PHM.png
 
Quote from virtualmoney:
How is scatter plot got to do with CoIntegration? Or is it just correlation?
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By definition, two cointegrated markets have a stationary linear spread. In a scatter plot, the linear relationship is usually evident. By itself, this doesn't mean much (everything is tied to inflation, for example.) Consider the following pair which isn't cointegrated, and isn't correlated over long periods:
SP_SI_Line.png

(The last three years, there has been around 80% correlation of price and log(price), but only 15% correlation on return.) The linear structure is what we remove (hedge out) in pair-trading. The residual term, the spread of the scatter plot is what is traded.

If the spread of the plot is tight and uniform, such as
SCCO_BHP.png
, there is a consistent relationship (common factor) which continues to hold even at extremes. In convergence pair-trading, we are looking for such a relationship to drive spread convergence. Ideally, according to the literature, the scatter plot would be a cloud of white-noise about the linear relationship.

Since we are looking for tradeable pairs, we can tolerate some contrary structure
BTI_MO.png
and non-linearity (such as a smile), but without a degree of uniformity, there is no basis to the trade.
 
Quote from irucken:

Although I do not post regularly to this forum, I have been pairs trading in a similar manner to those here that have followed the lead of Jonnysharp.
Like many of you, I was using pairtradefinder to select pairs and run signals.
Eventually I migrated the system over to a customizable platform in order to manage more ideas & integrate other system metrics I like.
I have now been pairs trading since March 2010 and, by the end of October, was up 12.5% on unleveraged gross notional capital ...which is quite good.
Out of the 8 months, only 2 were losers.
My win rate was 76%, with my average gain at 2.3% & my average loss at -1.85%.
...once again, quite good.
November & December have not been nearly the same, however.
Back to back losing months.

As I have customized my system from the rather simple MOC entry & reversion to the mean exit that PTF is based on, I'm wondering how those "active" traders who are still following Jared's basic method have been faring?

Thanks & happy holidays to all
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Sept/Oct/Nov were all losing months for me. That was a first - to have 3 losing months in a row. December came storming back and I ended Q4 flat, which was also a first for me as I have only had single losing months with each quarter being profitable. I think those kind of draw downs are inevitable from time to time. It hasn't shaken my conviction in the approach. I think the danger when such a phenomena occurs is to change tack and look for something new. Just a hunch - but maybe why Jared turned his attention to FX?
 
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