Pairs Trading Strategy Model
- Thread starter Neutral_Al
- Start date
Hi Dave, thanks for the kind words, and it's great to be on board here.
Mark
looks interesting.
i trade pairs on intraday basics. i was right in about 80-85%. before-i may left position for overnight. usually-greater risk-greater reward. dont keep for more that two days-if treid did not going in you way, exit or it will kill you later.
since everything so great, i don't have stop or proper exit point)) sometimes-i just killing me. working on it.
usually-i just take 1% and run away)))) can tell- you easy can make 2-3% intraday on nasdaq stocks. problems-damm stocks so cheap now, you have to spend big good chunk of you profits on commisions. my point-can you make 10% in intraday in directional trading? yes....15% ? yes.. but-if you can make so much in one day-it cannot be easy. can you make 100% in one day-yes (in options for example)-go try make it....it may happends once in 10 years. but in pair-you create kind of limited risk-limited profit position and from statistical point of view-you have much better chance to make money.
sorry for bad english
since everything so great, i don't have stop or proper exit point)) sometimes-i just killing me. working on it.
usually-i just take 1% and run away)))) can tell- you easy can make 2-3% intraday on nasdaq stocks. problems-damm stocks so cheap now, you have to spend big good chunk of you profits on commisions. my point-can you make 10% in intraday in directional trading? yes....15% ? yes.. but-if you can make so much in one day-it cannot be easy. can you make 100% in one day-yes (in options for example)-go try make it....it may happends once in 10 years. but in pair-you create kind of limited risk-limited profit position and from statistical point of view-you have much better chance to make money.
sorry for bad english
Don't make it more difficult than it is!! It's great hedging strategy. Here are some ways I incorporate it into my trading:
Late afternoon leader/laggard play:
Take a look at the days leaders and laggards. As an example - let's say AMGN is looking strong at midday (up 3 %). Look for other biotechs that have poor charts and look like they may break down further. Use one of the laggards as your other half of the pair (let's say GENZ for this example).
Take one leg of the pair at a time. In other words, enter AMGN long at what you would consider a good entry point. If it starts gaining immediately, put off getting into the second leg of the pair. Don't use it until you have to!
There are 2 ways to get into "leg 2" of the pair:
1) If you see the GENZ setting up as a great short play anway -- pull the trigger. You're now in your pair. Figure out what your "spread" is and set up a chart w/ your 2 stocks and the realtime spread.
-OR-
2. If your long (AMGN) starts declining, put on the second leg at that time.
This afternoon startegy is a "high probability" play. Intraday leaders generally tack on additional gains as the day progresses. By the same token, intraday gainers tend to "decline less" than losers if the market heads south.
Other notes:
Some people prefer to put on the short side of the pair first (due to the uptick rule).
Exit the pair when the current spread meets your profit goal (or exceeds your loss tolerance).
Don't waste a lot of time worrying about "historical correlations", etc. Why pay some website $200/month for them to tell you that KLAC and AMAT would make good pairs!
I typed this very fast so I may have left out a few details. It's Friday -- time for Happy Hour!
GD
Late afternoon leader/laggard play:
Take a look at the days leaders and laggards. As an example - let's say AMGN is looking strong at midday (up 3 %). Look for other biotechs that have poor charts and look like they may break down further. Use one of the laggards as your other half of the pair (let's say GENZ for this example).
Take one leg of the pair at a time. In other words, enter AMGN long at what you would consider a good entry point. If it starts gaining immediately, put off getting into the second leg of the pair. Don't use it until you have to!
There are 2 ways to get into "leg 2" of the pair:
1) If you see the GENZ setting up as a great short play anway -- pull the trigger. You're now in your pair. Figure out what your "spread" is and set up a chart w/ your 2 stocks and the realtime spread.
-OR-
2. If your long (AMGN) starts declining, put on the second leg at that time.
This afternoon startegy is a "high probability" play. Intraday leaders generally tack on additional gains as the day progresses. By the same token, intraday gainers tend to "decline less" than losers if the market heads south.
Other notes:
Some people prefer to put on the short side of the pair first (due to the uptick rule).
Exit the pair when the current spread meets your profit goal (or exceeds your loss tolerance).
Don't waste a lot of time worrying about "historical correlations", etc. Why pay some website $200/month for them to tell you that KLAC and AMAT would make good pairs!
I typed this very fast so I may have left out a few details. It's Friday -- time for Happy Hour!
GD
Hey Royce,
Exited FO/ITT today at the close R=0.786 with 5.87% profit.
Not bad. Now will wait for reverse.
Al
Hey Dave,
I think the book is pretty good. It is written by professional HF managers. The perspective of a pro on pairs trading is hard to get these days. The models that hedge funds use are ether proprietary or cost a fortune. These guys kind of open up on a subject providing conceptual and technical info on how to trade pairs. They even talk about trading as a business and market/trader psychology. I find that entertaining and helpful. I actually built the correlation analysis portion of my trading system-to-be based on their formulas and concepts.
I am still straggling with entry/exit points however.
Al