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Pair Trading?
- Thread starter hfgx
- Start date
Start here...there are hundreds of pairs...it does take some research however.
http://www.pairtrader.com/index.php
Don
http://www.pairtrader.com/index.php
Don
You can start with reading the below thread:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=134253
http://www.elitetrader.com/vb/showthread.php?s=&threadid=134253
Quote from jones247:
Which is more profitable & less risky, pair trading of stocks or intramarket calendar spreads on futures?
I've been studying the latter for quite a while. I'm not very comfortable with stock pair trading. How has your experience been with it?
Walt
It really depends on how you're approaching any particular product or strategy. Being market neutral has always been smart in my opinion, especially for overnights. The Floor futures traders are pretty well equipped for themselves as far a being able to hedge properly, not leaving too much room for arb (again, just in my opinion, I'm sure some do well).
Don
I trade both. In my case:
- stocks pair trading: Smaller positions, higher trading frequency (holding periods of about 1 week), smaller profit per trade, and more diversity (about 10-20 pairs open at any one time). I generate the pairs and divergence signals quantitatively, with very little discretion (I only verify pairs are in the same industry, and no earth shattering news came out).
- futures calendar spreads: Larger positions (contract nominal size), longer holding period (about 1 month), larger profit or loss per trade, and more concentration (1-2 spreads open at any one time). I look at the story (planting, feeding, etc) and spread charts, and my selection of the spreads and entry-exit points are fairly discretionary.
My primary focus is quantitative trading, so I prefer (my) pairs trading over (my) futures calendar spreads. They are both profitable over long term, but the calendar spreads have sharper drawdowns.
- stocks pair trading: Smaller positions, higher trading frequency (holding periods of about 1 week), smaller profit per trade, and more diversity (about 10-20 pairs open at any one time). I generate the pairs and divergence signals quantitatively, with very little discretion (I only verify pairs are in the same industry, and no earth shattering news came out).
- futures calendar spreads: Larger positions (contract nominal size), longer holding period (about 1 month), larger profit or loss per trade, and more concentration (1-2 spreads open at any one time). I look at the story (planting, feeding, etc) and spread charts, and my selection of the spreads and entry-exit points are fairly discretionary.
My primary focus is quantitative trading, so I prefer (my) pairs trading over (my) futures calendar spreads. They are both profitable over long term, but the calendar spreads have sharper drawdowns.
thanks Don & Dareminator...
Instead of stocks, I've been considering pair trading on the ETFs that corresponds with the indicies (such as DIA vs. SPY)...
I'm surprised that you find intramarket calendar spreads on futures to be more volatile (i.e. larger drawdowns)... It seems to me that unless it's different crops seasons, the volatility in the spreads would be pretty mild. For, example, CL Jan vs. Feb seems like a pretty low risk spread position. Whereas if I were to enter a spread on two correlated stocks, then the potential of a major change in their spread is more likely than the crude oil example above.
As a matter of fact, I would think that the reason for more diversification with pairs on stocks and more concentration with futures intramarket calendar spreads indicate that pairs trading seems more risky.
Walt
Instead of stocks, I've been considering pair trading on the ETFs that corresponds with the indicies (such as DIA vs. SPY)...
I'm surprised that you find intramarket calendar spreads on futures to be more volatile (i.e. larger drawdowns)... It seems to me that unless it's different crops seasons, the volatility in the spreads would be pretty mild. For, example, CL Jan vs. Feb seems like a pretty low risk spread position. Whereas if I were to enter a spread on two correlated stocks, then the potential of a major change in their spread is more likely than the crude oil example above.
As a matter of fact, I would think that the reason for more diversification with pairs on stocks and more concentration with futures intramarket calendar spreads indicate that pairs trading seems more risky.
Walt
Walt....the ETF's are generally too correlated to give us enough movement to profit from. Some guys use baskets of stocks vs. the index and do a bit better. And, regarding futures, I refer to the equity indices, not the commodities.
We do a lot of homework with our pairs trading, and find that we smooth out the risk curve by having pairs in multiple industries etc. But, the real money is made in the intraday in and out (as mentioned by TraderD above)....we hold at the extremes, and see a lot of reversals upon next day openings etc. In addition the MOC's have been fun lately, providing some good "spring back" at end of day.
All the best,
Don
We do a lot of homework with our pairs trading, and find that we smooth out the risk curve by having pairs in multiple industries etc. But, the real money is made in the intraday in and out (as mentioned by TraderD above)....we hold at the extremes, and see a lot of reversals upon next day openings etc. In addition the MOC's have been fun lately, providing some good "spring back" at end of day.
All the best,
Don
Thanks Don,
I guess that if I were to venture into pairs trading, I would need to join a prop firm such as yours in order to get the needed leverage for this to be a worthwhile strategy for me.
Between pairs trading and the open orders strategy, which is more reliable/profitable for you? I've been wavering back & forth about the pros/cons of prop firm trading.
Ultimately, the bottom line is: "is it probably for me to pairs trade thru a prop firm & earn a decent living"? I guess I'm afraid to take the plunge because I'd hate to take a course of action that ends up in a dead end (i.e. unprofitable & wasted efforts).
Walt
I guess that if I were to venture into pairs trading, I would need to join a prop firm such as yours in order to get the needed leverage for this to be a worthwhile strategy for me.
Between pairs trading and the open orders strategy, which is more reliable/profitable for you? I've been wavering back & forth about the pros/cons of prop firm trading.
Ultimately, the bottom line is: "is it probably for me to pairs trade thru a prop firm & earn a decent living"? I guess I'm afraid to take the plunge because I'd hate to take a course of action that ends up in a dead end (i.e. unprofitable & wasted efforts).
Walt