bob..i agree with you about correlation, but in regards to the pair whose chart u posted i wouldn't go into it..i've read the pairs trading manual and in it there is a very good point made..keep away from trending pairs..in pairs trading the trend is not ur friend..a good pairs chart has flat boundaries , where the pairs bounces off..in other words the pairs is constantly reverting back to its mean..
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Pairs Trading Strategy Model
- Thread starter Neutral_Al
- Start date
Originally posted by galtg
bob..i agree with you about correlation, but in regards to the pair whose chart u posted i wouldn't go into it..i've read the pairs trading manual and in it there is a very good point made..keep away from trending pairs..in pairs trading the trend is not ur friend..a good pairs chart has flat boundaries , where the pairs bounces off..in other words the pairs is constantly reverting back to its mean..
i trying to understand, big_jdez picks from his file OR what all this stuff(that i mentioned in my post above) means. also, so far, i did not understand a logic or criteria for entry point in pair trading.
as i understand it, trader enter into position, because he believe, that difference between two stocks based on his analysis big enough to enter? what time frame most of pair traders use?
why they use dollar ratio instead of plain % change difference?
why they always talking about historical correlation?
from my point of view-best picks will be always those stocks, which make crossovers every day.(i already mentioned it) but they keep talking about correlation. what about DIA-SPY? correlated enough? can you lose money on it? o yeah!!!!! yes you can... i'm asking for pure and simple explanation of pair trading, enter /exit point and i will be more than happy to see picks or actual trades(like i did) and then-we can work together on something.
also, i'm looking for someone, who may help me finish my own intraday pair trading strategy. i will post examples of it later.
i need a person, who will perform simple calculations and smart enough to analyze things. i been work on software for pair trading and simply don't have enough time to do all this stuff.
thank you!
Correlations are tricky because stocks that have been historicall correlated can suddenly become uncorrelated. The realization of this unhinging lags due to the nature of statistics and real money can be lost.
At the risk of giving up some secrets I find its great to pursue pairs where there is both a fundamental as well as statistical correlation. The fundamental correlation allows you to confirm that a spread, indeed, has gone out of whack along with the correlations.
Example: BKS and GME.
-- BKS has a $1.4B mkt cap and GME has a $1B mkt cap. BKS happens to own 63% of GME, or about $630M of GME.
-- BKS is currently at $20, give or take, and they are on target for earning about $1.75 this year. GME contributes about $0.37 of that, leaving $1.28 in earnings from the book biz.
-- without getting into all the gory details, if you subtract the GME stake from BKS/market cap and subtract the contribution to earnings BKS is grossly undervalued compared to other book companies (BGP), other mass retailers, and the S&P 500.
-- GME also is overvalued compared to other game retailers (ELBO), other mass retailers (BBY, CC) and the S&P 500.
Due to the enormous stake BKS has in GME there should be some correlation between the two stocks. That correlation has gotten out of whack (BKS's stake in GME is being valued at 0 by the market).
What's the play? Long BKS/ short GME. Lets take some extremes:
A. GME doubles and BKS stays the same. Not likely since now GME is worth more than BKS. A great past example of this situation working itself out is COMS / PALM.
B. GME stays the same and BKS goes down 20%. Again, not likely since now the public is valuing the book business at zero. The book business has either grown or been flat every year since 1920.
C. GME goes up 10% and BKS goes down 10%. Possible given the enthusiasm for video games and the reluctance of people to buy other retailers' stocks. In that situation I would buy more of the pair (but more BKS and short more GME) simply because either:
a. the book business is being valued at close to 0 which is unrealistic when you look at comparables
b. the stake in GME is valued at negative. BKS then simply dividends out the stake in GME and the stock goes up accordingly.
I've had enormous success with pairs like this throughout this bear market and even during the bull rallies. I've also written a lot of code figuring out correlations between related stocks, etc. and that stuff just never seems to work out if you base it solely on statistics and completely ignroe fundamentals. Just my two cents.
At the risk of giving up some secrets I find its great to pursue pairs where there is both a fundamental as well as statistical correlation. The fundamental correlation allows you to confirm that a spread, indeed, has gone out of whack along with the correlations.
Example: BKS and GME.
-- BKS has a $1.4B mkt cap and GME has a $1B mkt cap. BKS happens to own 63% of GME, or about $630M of GME.
-- BKS is currently at $20, give or take, and they are on target for earning about $1.75 this year. GME contributes about $0.37 of that, leaving $1.28 in earnings from the book biz.
-- without getting into all the gory details, if you subtract the GME stake from BKS/market cap and subtract the contribution to earnings BKS is grossly undervalued compared to other book companies (BGP), other mass retailers, and the S&P 500.
-- GME also is overvalued compared to other game retailers (ELBO), other mass retailers (BBY, CC) and the S&P 500.
Due to the enormous stake BKS has in GME there should be some correlation between the two stocks. That correlation has gotten out of whack (BKS's stake in GME is being valued at 0 by the market).
What's the play? Long BKS/ short GME. Lets take some extremes:
A. GME doubles and BKS stays the same. Not likely since now GME is worth more than BKS. A great past example of this situation working itself out is COMS / PALM.
B. GME stays the same and BKS goes down 20%. Again, not likely since now the public is valuing the book business at zero. The book business has either grown or been flat every year since 1920.
C. GME goes up 10% and BKS goes down 10%. Possible given the enthusiasm for video games and the reluctance of people to buy other retailers' stocks. In that situation I would buy more of the pair (but more BKS and short more GME) simply because either:
a. the book business is being valued at close to 0 which is unrealistic when you look at comparables
b. the stake in GME is valued at negative. BKS then simply dividends out the stake in GME and the stock goes up accordingly.
I've had enormous success with pairs like this throughout this bear market and even during the bull rallies. I've also written a lot of code figuring out correlations between related stocks, etc. and that stuff just never seems to work out if you base it solely on statistics and completely ignroe fundamentals. Just my two cents.
bob..let me tell u what i just tried with limited success..like you i needed to find entry/exit points on daytrading pairs..so i took the daily net change ,irregardless of +/- and did a 5,10 and 30 moving average..as an entry point if the spread moved twice the moving average it was an entry point..mixed results..then i did a 5 ,10 and 30 day standard deviation which i multiplied by 2.5 figuring i was fading the spread towards an extreme..if there was news then i give them more room..i did this on highly correlated pairs mostly in the .90s again mixed results..plenty of good trades but also many that didn't turn..i wonder if this extreme market volatility is affecting results.
Originally posted by galtg
bob..let me tell u what i just tried with limited success..like you i needed to find entry/exit points on daytrading pairs..so i took the daily net change ,irregardless of +/- and did a 5,10 and 30 moving average..as an entry point if the spread moved twice the moving average it was an entry point..mixed results..then i did a 5 ,10 and 30 day standard deviation which i multiplied by 2.5 figuring i was fading the spread towards an extreme..if there was news then i give them more room..i did this on highly correlated pairs mostly in the .90s again mixed results..plenty of good trades but also many that didn't turn..i wonder if this extreme market volatility is affecting results.
Hi galtg!
man.......you been in to it deep enough.......
but, you missing something in your.......(system?)
MA or StdDev did not work there...(just my opinion)i think, i getting close to it, and
if you want, we can do something together.
and, if lok at my trades-you wil find, that i have about 90-95% positive trades. people just dont want believe in this)))))
problem-last few trades. if i have stop loss-it will be no problem, but......i did not.
sorry for maybe bad english
thank you!
At the risk of giving up some secrets I find its great to pursue pairs where there is both a fundamental as well as statistical correlation. The fundamental correlation allows you to confirm that a spread, indeed, has gone out of whack along with the correlations.
do think it's a secret? are you sure?
i just want to give you some examples of your secret weapon:
LLTC-MXIM
and you will see, how deep the losses can be, even if you have perfect picture....
those companies-damm twins fundamentally and by ANY other criteria, you can check it.
now-look @ daily % change chart.
if one stock % change>than other-i add it to previous close % change(opposite-just opposite)
there is no secret, and there is nothing new..........
but , i do believe-together-we can win.
Thank you!
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Originally posted by Vishnu
That pair is completely different from my example. Yeah, that pair is correlated. And trading that correlation might work. For awhile. But then one day it won't. And the spread will get wider and wider. And all the king's men won't be able to put it together again.
exacly. that why i work on intraday. it muck easier to predict price movement. and if you wrong-there is enough pairs to trade.
FNM-FRE been as perfect example for while here.........but...guys! common! yo ubeen sitting on it for two weeks for 3%?
huh......such waste of time.........look at this-
I been riding all day on it, but i want more.......i want whole nine yards....got more than 5% today just on ALTR-XLNX
and there is.still some room for all of us........
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vishnu..i've traded those pairs in the past..ltd-ibi is a perfect example only ltd was the stock that was the one being grossly undervalued..rd/sc also a classic example ..im always on the lookout for these but they arent easy money either.rd/sc went to a freefall when rd came out of the s&p..the one u quoted sounds risky.. its been trending lower..where does the trend end?