Pairs Trading Strategy Model

Hi everyone,

Still holding FO/ITT. Opened a new position today BK/MEL @ R=0.9190. I am planning to sit in it for a while. Despite some fundamental problems that BK had in a recent past, I still feel that the ratio will correct to 1.1 or so. Technically it looks just beautiful IMHO. Tight stop loss though at R=0.8900...

Al
 
Originally posted by Neutral_Al
Hi everyone,

Still holding FO/ITT. Opened a new position today BK/MEL @ R=0.9190. I am planning to sit in it for a while. Despite some fundamental problems that BK had in a recent past, I still feel that the ratio will correct to 1.1 or so. Technically it looks just beautiful IMHO. Tight stop loss though at R=0.8900...

Al
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Al are you doing any original research or are you merely taking the pair trading service's trades? Royce
 
Quote from royce09:



Al are you doing any original research or are you merely taking the pair trading service's trades? Royce
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Hi Royce,

I am doing both. I only trade some of the Pairstrading.com's pairs that make sence to me such as MXIM/LLTC, GM/DCX, TGT/WMT, SBC/BLS, XLNX/ALTR, FO/ITT, AGN/MRK.
I am also testing 2 year correlation with ratio at 2SD from the mean or greater where the graph crosses 10DEMA in the direction of the 50DEMA. A good example would be KLAC/NVLS. Once I am done with that I am going to add some more Tech Indicators to confirm oversold/overbought conditions such as 14D RSI and Stochastics. I'll let you know the results.

Al
 
hi nitro,
thanks for your reply. i appreciate your thoughts and feel that you are right in extending the timeframe and add to loosing position, which has to some extent the same effect by smoothing your average entry price.
what i find so interesting about the whole thing is, that it is not quite obvious why the situation is as it is. i think the market place is an integrated object that cannot violate certain rules for too long without creating extreme inefficiencies. basically there might be two major explanations for the current situation: the bear market distorts the level of market integrity subtsantially, which i doubt since the correlations between stocks do not seem to deteriorate. or there is much capital (not necessarily many people) playing the same game in the same way, thus eliminating the "obvious" inefficiencies. i think the existence of a service like pairstrading.com is an indication in that direction. who did pairstrading fifteen years ago?
i think that there is much money betting in this area so it might be necessary to explore completely different tools for analyzing and trading. as a person interested in systematic trading i find that extremely challenging since it inherently requires some kind of selflearning systems.

peace
 
Hi all:

I am new to this forum, and have found the postings interesting. I have been researching/trading pairs for a while now, and have found Ordinary least square regressions to be an ineffective tool. I do agree with Man, that new systems need to be developed, for us traders to maintain an edge over mass marketers like 'pairstrading.com'. My suggestion is for all of you to think about other tools to build your models, a possible answer could be orthogonal regression. Has anyone worked on this before? I welcome other suggestions & comments.
 
u have got to trade them. market rallies cover your short, market tanks you have a free bullet. put em on take em off all day. everyone in here is talking correlation and looking at 1 or 2 year charts. i day trade and i prefer to be flat, if i have that option. so when u look for pairs look to see if they go way out and come way in during the day not if they come back within a year. spread goes up a dollar back down a dollar back up a dollar this is ideal. some of these pairs i seen here used as examples are horrible like sbc and bls or adi txn i traded those before and they suc because they trend. a few months ago i was putting on txn adi started at $4.50 to go up (long adi). i like to add every .30-.40 cents. sure enough the spread went negative stayed there and wouldnt go i up i held it and held it traded the best i could, the txn specialist is criminal. anyways i was ready to take a loser then it finally bounced and its been trending ever since. these stocks are pigs. i put it on if adi is up over 2.50 and txn is up less than a dollar and first thing in the morning it comes in enough to take a quick profit. if u play this pair this is how u should play it. sbc and bls is worse. i would rather take a nap in my chair right at the open then trade these slow stocks. good luck all
 
Quote from trendsetter:

u have got to trade them. market rallies cover your short, market tanks you have a free bullet. put em on take em off all day. everyone in here is talking correlation and looking at 1 or 2 year charts. i day trade and i prefer to be flat, if i have that option. so when u look for pairs look to see if they go way out and come way in during the day not if they come back within a year. spread goes up a dollar back down a dollar back up a dollar this is ideal. some of these pairs i seen here used as examples are horrible like sbc and bls or adi txn i traded those before and they suc because they trend. a few months ago i was putting on txn adi started at $4.50 to go up (long adi). i like to add every .30-.40 cents. sure enough the spread went negative stayed there and wouldnt go i up i held it and held it traded the best i could, the txn specialist is criminal. anyways i was ready to take a loser then it finally bounced and its been trending ever since. these stocks are pigs. i put it on if adi is up over 2.50 and txn is up less than a dollar and first thing in the morning it comes in enough to take a quick profit. if u play this pair this is how u should play it. sbc and bls is worse. i would rather take a nap in my chair right at the open then trade these slow ass stocks. good luck all
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We are working on a similiar concept of a portfolio of pairs, pulling the shorts on an up run, pulling the longs on a down-run, putting them back on as the run stalls.

Are you making money?

How many pairs are you doing at a time?

Are you doing it manually?
 
Yes. I've been doing some trend following pairs using 60 minute bars and bollinger bands. It's usually best to go with the trend when the spread starts to ride on of the bands, basically going parabolic in it's movement. If you are trading convergence, this would be a bad sign and you probably have a lot of pain coming while you wait for things to revert to a mean, which is probably starting to trend now too.
 
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