check out the correlation of the volatilities between DUK and DUR when DUK had a downswing abt 1.5 months ago. the correlation between the 10 day historical volatility went from 0.97 to 0.80. Then look what happened to both stocks in the week following that. Factor in the beta of both securities, plus the yield on DUR, and it gets interesting.
Pairs Trading Strategy Model
- Thread starter Neutral_Al
- Start date
I see your point. I never looked at stocks of differnt type of the same company. I am a little scared that there might happen legal or accounting changes and I jump on a trade which is none.
From the chart I would think that I would have seen the trades, you are referring to. It looks like you can trade the spikes of the spread.
peace
From the chart I would think that I would have seen the trades, you are referring to. It looks like you can trade the spikes of the spread.
peace
This morning Salomon Smith Barney lowers ratings on oilfield equipment and services. I have noticed that many times SBSH will recommend 'rotation' from one stock to another, which suggest the two may have similar fundamentals, products or services, (taking market share away from a competitor, etc) for good pair trades.
This morning, they DOWNGRADE WFT (Weatherford Int) to In Line from Outperform and UPGRADE VRC (Varco Int) to Outperform from In Line.
In recent weeks, similar upgrade/downgrade news between APA/BR yielded about 4% in a few days, and more than 15% between NSM/MU.
This kind of news often serves as a fundamental-based catalyst, but still needs to check out to your technical/statistical rules before entry. Remember to keep tight stops in case they don't trade as expected.
This morning, they DOWNGRADE WFT (Weatherford Int) to In Line from Outperform and UPGRADE VRC (Varco Int) to Outperform from In Line.
In recent weeks, similar upgrade/downgrade news between APA/BR yielded about 4% in a few days, and more than 15% between NSM/MU.
This kind of news often serves as a fundamental-based catalyst, but still needs to check out to your technical/statistical rules before entry. Remember to keep tight stops in case they don't trade as expected.
This is an interesting thread, but has anybody tried to adjust their parameters with the day of the week? I have a swing trade system and i've noticed that there is a historical diference for each day of the week.
Just something one might look into a bit.
jj
Just something one might look into a bit.
jj
Al,
I was busy with another project for some time, sorry. I have tested your ideas with different stocks as well and I find whole concept sound and interesting.
I`ve been through whole this thread since then, so few thoughts come to my mind:
1. No such correlation is perfecty reliable, but as you said once the correlation is broken you may just accept losses. Risk/reward ratio is just simple statictics.
2. The key as usuall, is diversification. Trading few different correlations should make equity line smoother.
3. Considering all above I believe that trading pairs needs to be well sized to be consistently profitable. Intraday trading may lower requirements, but this is another story.
Anyway, I find myself whole idea very interesting. Thanks for bringing new light into trading area.
Hi everyone,
I haven't looked at the thread for quit some time, was out for Christmas and New Year. No trading for the past two weeks, just hot sun and warm ocean...
Now I am back. A lot of my pairs that exhibited extreme oversold/ overbought conditions in Nov. and Dec. are now converging. Makes me think that we are approaching an important top. I ran some stats: the highest number of extreme pairs occurs in the middle of a trend. They tend to converge the most at the tops and bottoms.
The earning season is approaching... gotta be careful. On the other hand, could not help today to open a new position MU/ALTR R=0.6950. It looks extremely oversold(14 D RSI below 30 since mid Dec.), should correct.
Any thoughts?
Happy New Year To All
Al
I haven't looked at the thread for quit some time, was out for Christmas and New Year. No trading for the past two weeks, just hot sun and warm ocean...
Now I am back. A lot of my pairs that exhibited extreme oversold/ overbought conditions in Nov. and Dec. are now converging. Makes me think that we are approaching an important top. I ran some stats: the highest number of extreme pairs occurs in the middle of a trend. They tend to converge the most at the tops and bottoms.
The earning season is approaching... gotta be careful. On the other hand, could not help today to open a new position MU/ALTR R=0.6950. It looks extremely oversold(14 D RSI below 30 since mid Dec.), should correct.
Any thoughts?
Happy New Year To All
Al