Pairs Trading Strategy Model

[Homer]

one big problem with trading pairs (especially intraday) is that you have double the volume for each trade. With decimalization and the historically low volatility it has gotten tougher & tougher to cover expenses. I am encouraged about the recent push in the market because I think higher stock prices will translate into bigger moves in the pairs. I also think that as we top out (I think we are close, but who knows ) we will see the volatility levels take off as well which I think is the key to making money (intraday) in pairs. I do think that the migration of the majority of day traders out of stocks and into futures has hurt as well. just my 2 cents
Good Luck,
Homer

 

[tpk]

any decent books on pairs trading.

 

[sslavin]

Intraday pair scalping has been unreal lately. It's very tough to make anything without having multiple legs...it's possible...but it's tough. It requires a lot of patience and multi-tasking. I'm trading at least 5 at a time -- going after 25-75c moves. Tough stuff. Overnights haven't been too bad. Swing trades are consistent as long as you avoid the story stocks (or trade the trends on them).

Good books to read? I think the guys from www.pairstrading.com has a manual. I know the guys from www.pairtrader.com have a huge manual -- specifically geared for daytraders and active traders. I know of NO other published works that specifically focus on equity pairs.

Good trading.

sslavin

 

[PoundTheRock]

Quote from sslavin:

Good books to read? I think the guys from www.pairstrading.com has a manual. I know the guys from www.pairtrader.com have a huge manual -- specifically geared for daytraders and active traders. I know of NO other published works that specifically focus on equity pairs.

Good trading.

sslavin

Each of these books has a chapter or two on equity pairs trading:

http://www.amazon.com/exec/obidos/tg/detail/-/0071359958

http://www.amazon.com/exec/obidos/tg/detail/-/0971853649

 

[tpk]

thanks

 

[nitro]

Quote from man:

... where is future returns.

nitro, where do you see increasing returns? which strategies do you think will outperform with the next let's say two years?


peace

IMHO,

In the current environment, the "opportunities" are in what the market is keying on:

1) Dollar/Euro
2) Bond "Bubble"
3) Natural Gas/Oil

Trade idea for 1) Take a look at Adidas Solomon AG/ NKE Pair
Trade idea for 2) much harder, but look at the coorporate bond spreads vs the NOB spread
Trade idea for 3) Tons of companies to choose from.

nitro

 

[ascheer7]

Does anyone know what is going on with the pairfinder site. It appears to have shut down today.

 

[man]

nitro
I like the idea to follow the action in order to profit from inefficiencies happening then and I especially like the idea of pairs trading Euroland against US, expecting negative surprises once these companies realise the rate change in their books.

I think the only way to overcome the problem of high hit ratio with low profit factor in pairs trading, the latter due to big losses now and then, is bigger portfolios. This, in most cases, will require a systematic approach.


peace

 

[man]

nitro
I think after so much turmoil in the corporate credit market in the last two years there are quite many distortions, yet the spreads for corporate credit have come back substantially already. I think it is quite possible to play the US curve, yet I have found no systematic approach so far, that makes me happy.

What are you trading? Index futures? You indicated that you are not so much in stock pairs any more. Are you playing futures spreads?

peace

 

[Hurricane]

Here's a pairs trading recommendation that came out from an analyst this morning. Naturally, I'm on the wrong side of this one. A good example of where playing divergence based on the fundamentals would have been better than expecting convergence based on technical analysis.

7:46am 06/13/03
UBS suggests 'pairs trade': buy Federated and sell May (FD, MAY) By Tomi Kilgore
Analyst Linda Kristiansen at UBS Investment Research is recommending a "pairs trade" -- buying Federated Department Stores and selling May Department Stores -- given that the companies' strategies and execution "are diverging to a greater extent that we can ever recall." Kristiansen upgraded Federated (FD) to "buy" from "neutral" and lifted her price target to $44 from $30, citing increasing confidence in the company's relative growth rate, and belief that Federated will continue to gain market share at the expense of May and others. The stock closed Thursday up 40 cents at $36.58. She also downgraded May (MAY) to "reduce" from "neutral" and cut her price target to $18 from $20 on expected sales underperformance and margin pressures. The stock is sliding $1.08, or 4.7 percent, to $22 in Instinet pre-open trading. She noted that May was implementing a more "clearance-driven" strategy, while Federated was "dialing down" promotional activity.