Pairs Trading Strategy Model

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Neutral_Al

I have been lately introduced to pairs trading. It sound like it is a great strategy to trade uncertain bear market in a trading range. I am looking for resources to learn more and develop my own strategy/model. Please help!:confused:

Thanks
 
There are articles in past issues of TASC - that's a good start...

Also, don't forget to use the search feature on the upper right hand corner of this screen.

nitro
 
This is what I did so far:

1. Zurich Capital report on Market Neutral Hedgefunds - up to 120% annual return with very high Sharpe Ratio. Sounds good. The question is what kind of model do they use? Is it technical model based on correlation, or is it a fundamentals based long/short model? Any thoughts?

2. I found a site www.pairstrading.com. Sounds like these guys are doing a pure technical play based on 2 year correlation analysis. Looks promising. Subscribed to their free trial. Will see what happens.

3. From the logistics stand point: what is the best market data source (inexpensive, reliable, clean data)? I want to start with correlation.

Thanks for any input.

Al
 
Checked out pairs trading site, signed up for trial period to see what they do but can't get any response from them. Calls and emails have gotten me nowhere. Are they still in existence?
 
I have no problem with www.pairstrading.com so far. I continue to receive my updates daily. I use Qcharts to study the recommendations. This is the only affordable charting service that lets you plot the ratio(stock1/stock2) that I now of.

I am trying to figure out their model. I know it is correlation based. I am able now to calculate two year correlation myself.
Now the question is what else to use to pinpoint the exact entry and exit point? By the way, they could not have been blown out of a pair because the use stop losses - rule #1 for any trading system. Anyway, I figure that a combination of RSI and 2SD delta from 40MA should do at first. Then I'll try to add some more TA indicators.

How can I get put/call ratios for S&P stocks? The idea of adding a sentiment indicator to a technical model is appealing.

Will keep you posted.

Neutral Al
 
does any one know how to figure out ratios on pairs... like i have been told mrk to lly is a 5 to 4 ratio... how is this fugured out? and how often will this ratios change?? thanks in advance..Rocky
 
Originally posted by shortseller
does any one know how to figure out ratios on pairs... like i have been told mrk to lly is a 5 to 4 ratio... how is this fugured out? and how often will this ratios change?? thanks in advance..Rocky
More...
Just do it in dollars. Ideally, you want your total dollar value hedged, or paired, in this case.

MRK is trading at 49.24. So, for 1000 shares, you have $49,240. Now take the $49,240 and divide it by $58.05 or the price of LLY, and you get 851 shares.

So, you can trade 1000:851 or some multiple or fraction of that. You can even do some rounding off and you'll see that's in a ratio of approximately 5:4.
 
The ratio is 0.8244 at 14:22 today. AGN is a much better hedge/pair for MRK. The correlation over the past 2years is much higher. If you still want to trade MRK/LLY, I would suggest to wait for R=.8 or lower.
 
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