Pair Trading Strategy Journal

The following is quote is from koolaid who posted on Charts of Note.

Quote from koolaid:

I closed a bit early and took a small loss. I had that pair opened for almost a month.
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koolaid, it is unusual but not extraordinary to go into a 3rd month of open trade as this trade did. But thankfully it allowed us to add layers. Just understand that by doing so with the associated, additional layers added on AND most importantly looking back at the longer term charts....2 months, 6 months, 1 year....there was plenty of evidence that this pair has experienced spreads as large as what we were experiencing. This obviously illustrates the pair will return to the mean if not totally, then at the least, very much so to allow us gains.

PLEASE LOOK AT MY POST THAT SUPPORTS THIS ON July 17..chart 4.
http://www.elitetrader.com/vb/showthread.php?s=&postid=3843714#post3843714

In fact on chart 4, I accidentally left out an additional, very recent date that also indicated the large spread that occurred after we got into this trade is not unusual. All of those earlier large spreads returned to a more normal spread that would allow us to make money again.

Finally, if you have not traded my style, or even if you have for a few years, it is easy to bail out prematurely. There is no shame. We all can take only so much "pain." But with experience, you begin to understand the pain is opportunity to take advantage of with My Style of pair trading. I won't say a black swan cannot exist, but I take great pains in picking a pair to allow that probability to be one that defies all odds.

You might wish to read this post today I made on a new thread that someone started on mean reversion.

http://www.elitetrader.com/vb/showthread.php?s=&postid=3851399#post3851399
 
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3855753>

It is not my custom to front run posted charts of proposed trades. I doubt that it would appreciably move the meter inside the population of ET traders for someone like myself who holds longer than typically for a pair trader. I just post for courtesy and other innocuous purposes.

Exiting my trades are generally posted after the trade closes. If there is merit in posting before proposed trades are opened, why not post proposed exits ? Simple answer: In the time it takes to compose and post a chart, I may change my mind about exiting due to the exigencies that influence stock plots during said time.

In the posted illustration here, however, this description of exiting a position may be limited to being applicable to my style of pair trading which enjoys high frequency of numbers of gains to total trades, all be it targeted to doubles, but frequently all other level of hits are experienced.....singles, triples, home runs, and grand slams (multi-layered positions). The style, as implied, results in unusually safe trades and investments.

This chart and its accompanied text explains one modality of an exiting style frequently used in my group.

An aside for interest: I know this pair very well over the years and seldomly trade it, because traditionally it has been like watching paint dry. I have called it a beginner pair to trade for newbies.

However, it has recently taken on a new life. A few months ago it took on a spread highly unusual although I could not find anything fundamental to have caused it. I bet the farm on it then, and it worked as expected. It was a rare aberration that quickly reverted to the mean. Since then, it has continued to create and maintain spreads I am not used to seeing with this pair. I made the current trade a factor two trade with a stake more than usual but nothing like the giant one I described earlier; the pair had become quirky. I had made up my mind I would watch it revert to the mean quickly again and continue to hold fast. I am still waiting way beyond my expectation. In the meantime, it has rolled 4 times with sufficient frequency and spread that I could have booked my intended longer term, sit-and-hold gain with a series of scalps and then some had I done my usual scalping, and these would have been nice ones !

Generally, frequently with most pairs, a series of scalps can be made which is a wonderful characteristic of pair trading.......Pairs can generate a predictable rhythm. Unfortunately, too many times, that last scalp with its booked gain leaves you at the station as the pair continues robustly in the direction that the original trade had intended to harvest ! If WRY KIM pair continues to be consistently contra to its traditional, multi-year conduct, it could become a gold mine for being an incessantly rhythmic, rolling pair spread.
 

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Hello dear pairs trader,

although I already trade/scalp a few years, pair trading is a new field for me. I red Ganapathy Vidyamurthys book and try to programm his approach for my Ninjatrader. Nevertheless, I do not understand how he identifies profitable pairs. Is there a webinar or seminar where you can learn all the steps to identify tradeable pairs?

Best regards,
Harvard
 
Quote from Harvard:

Hello dear pairs trader,

although I already trade/scalp a few years, pair trading is a new field for me. I red Ganapathy Vidyamurthys book and try to programm his approach for my Ninjatrader. Nevertheless, I do not understand how he identifies profitable pairs. Is there a webinar or seminar where you can learn all the steps to identify tradeable pairs?

Best regards,
Harvard
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Congratulations.......You graduated from high school before completing elementary school. You probably did not have that in mind, but rather were disappointed when the subject of your question was not addressed to your satisfaction in the book. Nevertheless, you are probably light years ahead of rookies by having read that book first.

I would prefer to defer your question to those veterans of pair trading who are eminently more qualified than myself in conventional pair trading. I highly recommend for you to send a private message to those traders that impress you the most from reading their posts on this thread from its beginning. If you only read/scan the first 6 weeks of posts, you will (1) identify exceptional pairs traders I infer them to be, but (2) you will miss the many others that first appear well after the initial 6 weeks of posts on this thread. Not that they will mentor you, but hopefully will be kind enough to direct you.

It would appear an impossible task to read all 3 or 4 years of this classic thread. But you would learn a lot including learning who those would be who obviously know the answer to your questions.
They are the stereotypical pair traders you are looking for. Most either program and/or use software to find their pairs.

I personally don't do either. I am self taught and not of their discipline. My only knowledge of what you are looking for is what I associate the paid-for software as having, and there is lots of it. You would learn something of those by reading this thread. I found this thread in the first 12 months of pair trading, and I choose not to pursue their approach only because I was doing something already very successful to my satisfaction during this developmental stage for me; I choose just to continue on with it.

I started posting charts on Aug 1, 2012 in the MAIN section EliteTrader in the TRADING forum that includes CHARTS OF NOTE thread. They were crude without much explanation to them, but then all one has to do to understand them is LOOK. Comic book simple with the highest priority on SAFETY which means minimal probability of loss.
http://www.elitetrader.com/vb/showthread.php?s=&postid=3586686#post3586686
The links I sometimes posted did not work because of my ignorance on how to do that at the time. However, the company ET folks were exceptionally responsive to my email cries for help. I am grateful.
It wasn't until the end of August or well into September of 2012 did my charts become better and my links worked better.

I do not like placing narratives about my charts, except what little may exist on the charts themselves, at the Charts of Note thread. The thread was not meant for that. But then again, the charts speak for themselves. However, if there was much to be said, I sometimes used this thread for that purpose with links between the posts on the two threads. Unfortunately in those early days, those links did not work, but at least you could have two web browsers up to see the chart on one and the narrative on the other, using the two thread to complement each other. I started posting on this thread by introducing myself somewhat in the second week of August 2012. Since then, much of what my style of pair trading is about is on this thread. Its about the closest I can respond to you with respect to where a seminar is !
http://www.elitetrader.com/vb/showthread.php?s=&postid=3596885#post3596885

To be fair to the software vendors, I suspect some do have educational presentations that are basic to this trading, probably universal, before moving on to explain their own software. In time, I anticipate having a web site that will explain in detail my tact, its simplicity and high probability of trades with booked gains compared to overall number of trades made. It will be an exchange for contributing and receiving nominations for pairs, but in a filtered and disciplined way so as not to waste the visitor's time. My big disclosure is I leave behind the need to put on numerous trades that swing for home runs in favor of the consistency of getting singles and doubles along with occasional extra bases and low numbers of strike outs. High testosterone traders would find that boring. My style appeals to the tortoise who will finish the race in good standing, year after year, along with high mental hygiene generally unaffected by direction of speed of the market. Perhaps I am conservative in describing consistency in favor of extra bases, because what makes my trades historically safe, are similarly what makes them decent gains: I look for the historically unusual aberrations.

Stay in touch and let us hear what you find. Certainly I will be here to welcome questions or comments about my style.
 
Thank you deucy28,

your response is a big help for my education. I think I will start reading the complete thread. I've learned until now, that there are for important properties for a pair:

1) Cointegration (VECM)
2) Correlation
3) Volatility
4) similar fundamental data

O.k....after reading the thread I will reflect the essence of my new knowledge...

Best regards,
Harvard
 
Quote from deucy28:

The post and chart a few posts up on Aug 9, 2012 addressed the subject When to exit a pair trade ?
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The earlier post addressed when to exit a pair trade and revolved around the illustration of a trade that had just opened.

This is a follow up of the subject now on the day the trade was closed (today) at the target spread.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3859030>
 

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Quote from Harvard:

Thank you deucy28,

your response is a big help for my education. I think I will start reading the complete thread. I've learned until now, that there are for important properties for a pair:

1) Cointegration (VECM)
2) Correlation
3) Volatility
4) similar fundamental data

O.k....after reading the thread I will reflect the essence of my new knowledge...

Best regards,
Harvard
More...

The patient and studious are base characteristics to contributing to a higher probability of "making it" IMHO.

I would add you must find whatever word you wish to apply to "having sustained joy." If you cease enjoying what you are doing, find something else. "What you are doing" refers to the holistic. In other words, are there ample resources for supporting your effort......books, articles, ET posts, mentors, group exchange, etc. ? These are integral to sustaining the joy.

At some point, too, you have to judge whether there is meat to what you are doing and not just entertainment. Focus on your original objective and hope the joy will be sustained in the manner I described, but that in your judgment your time is constructive.

It this all comes together for you in pair trading / investing, then eventually you will ....

....Trade well and prosper
 
Deucey and others, what are your thoughts on this pair at the moment.

CI- SHORT
AET-LONG

<IMG SRC=http://www.elitetrader.com/vb/attachment.php?s=&postid=3863800>
 

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Quote from koolaid:

Deucey and others, what are your thoughts on this pair at the moment.

CI- SHORT
AET-LONG
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koolaid, you need to post your charts with a smaller size; it currently is awkward for the page you are posting on. I can direct you if you need help. But first, always review your post to make sure you are not outsizing it for the page, please. I only have a laptop now while traveling and I can't fit all your chart on my screen. (My user name is spelled differently than your spelling of it.)

You may have been reading my posts from last summer on Main / Trading / Charts of Note where I started posting beginning Aug 1. I have traded this pair many times in the past and remains in my watchlist. Your posted chart was lifted from a very old, earlier post of mine of that pair.

I am traveling now, but will be up and running shortly I hope to be soon with my resources to answer your qtn about this pair's current status. You asked about it some days ago, I encourage posts like yours. TY !
 
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