Pairs Trading Strategy Model
- Thread starter Neutral_Al
- Start date
Ain't that the truth!
The biggest issue for me lately is justifying risk for the reward, and frankly there are many hours in the day where the risks are just not worth it.
I've heard someone say that on any one pair they'd be willing to risk 25% of their account. I heard this recently and it blew me away. This is the dumbest thinking I've ever heard.
I really think there are some people who are doing well in this environment, but I'd have to say the large majority of them are risking A LOT to make a little. If you have to support a wife, babies, huge mortgage, big city expenses, etc. then risking a lot to make a little isn't an option.
A trader friend called me today and said he spoke with Bob Bright about getting back into trading. His reply was that those that are making money are trading huge and trading for little gains. He said 10,000 share lots. I'd like to see how they're getting filled on that 10,000 shares!
I also hear thru the grapevines that mutual funds are programming the fills of 50,000 share lots and whatnot. They're taking out the human doing the filling. It's subsequently helping the funds, but it means tape reading's going to get worse not better. That's all I do, so it's clear there has to be some adjustments on my part. It also means that gaps on NYSE stocks aren't going to happen much, and that ranges are likely to be reduced. So, the way I see it...we're going to have to adapt because I don't see anything changing to help the professional daytrader anytime soon.
As far as the economy goes, Greenspan is setting up the market to chop for at least another 4 quarters. Unless there's some world event I don't see the uphoria for speculation coming back either.
So, that's my 3 cents for tonight.
-- ss
The biggest issue for me lately is justifying risk for the reward, and frankly there are many hours in the day where the risks are just not worth it.
I've heard someone say that on any one pair they'd be willing to risk 25% of their account. I heard this recently and it blew me away. This is the dumbest thinking I've ever heard.
I really think there are some people who are doing well in this environment, but I'd have to say the large majority of them are risking A LOT to make a little. If you have to support a wife, babies, huge mortgage, big city expenses, etc. then risking a lot to make a little isn't an option.
A trader friend called me today and said he spoke with Bob Bright about getting back into trading. His reply was that those that are making money are trading huge and trading for little gains. He said 10,000 share lots. I'd like to see how they're getting filled on that 10,000 shares!
I also hear thru the grapevines that mutual funds are programming the fills of 50,000 share lots and whatnot. They're taking out the human doing the filling. It's subsequently helping the funds, but it means tape reading's going to get worse not better. That's all I do, so it's clear there has to be some adjustments on my part. It also means that gaps on NYSE stocks aren't going to happen much, and that ranges are likely to be reduced. So, the way I see it...we're going to have to adapt because I don't see anything changing to help the professional daytrader anytime soon.
As far as the economy goes, Greenspan is setting up the market to chop for at least another 4 quarters. Unless there's some world event I don't see the uphoria for speculation coming back either.
So, that's my 3 cents for tonight.
-- ss
That's very true. I can't believe lately how many fills it takes to get 500 and 1000 share orders done. Can you imagine a 50,000 share block. It could take the computer a while...and meanwhile...we're the ones getting sliced and diced.
Has anyone else seen the programs that the funds use to place the orders. It'd be interesting if we could disect how they try to fill orders...then we could step in front of them as the little guy.
You know, something I've used in the past is basket software. Maybe I need to dust it off and try to play the fund game. I play those as relative strength trades. Make a basket of 4-6 stocks in every sector. Chart the basket. In a quote page watch for %change after the first 15 minutes. Buy the strongest, sell short the weakest. Typically the trade lasts a hour. You're out of the basket when say a 20 period moving average on a 2 minute is broken. Taking both off independently.
You could chart the difference between the strongest and weakest and then trade just the differential. Investor/RT software lets you do this quickly...if you're willing to spend sometime learning it.
-- ss
(maybe I too need some secret coded name! SS or sslavin's a bit boring, eh?)
Has anyone else seen the programs that the funds use to place the orders. It'd be interesting if we could disect how they try to fill orders...then we could step in front of them as the little guy.
You know, something I've used in the past is basket software. Maybe I need to dust it off and try to play the fund game. I play those as relative strength trades. Make a basket of 4-6 stocks in every sector. Chart the basket. In a quote page watch for %change after the first 15 minutes. Buy the strongest, sell short the weakest. Typically the trade lasts a hour. You're out of the basket when say a 20 period moving average on a 2 minute is broken. Taking both off independently.
You could chart the difference between the strongest and weakest and then trade just the differential. Investor/RT software lets you do this quickly...if you're willing to spend sometime learning it.
-- ss
(maybe I too need some secret coded name! SS or sslavin's a bit boring, eh?)
I have been considering this a lot lately. I just finished closing a position for about $6,000 profit, but I was in it for weeks, and at one point I was down about $30,000. I don't think this is wise, so I am going to wait longer to put on positions and add to the position much less frequently. I really don't know if this will increase my profit much, but I believe it will decrease the size of the draw-downs. Most pairs eventually revert - at least to a degree, but this is the biggest problem with trading pairs I think.
Is intra-day pairs trading worthwhile? Or is pairs more suited to swing and position trading?
I'd like to try implementing intra-day pairs for listed stocks but I want to make sure the potential profit offsets commissions. Doesn't pairs trading rely on efficient market theory, which was most notably debunked by the spectacular collapse of Long-Term Capital? Since pairs trading is inherently contra-trading (going against the trend by shorting an "overvalued" stock and buying the "undervalued" stock for each pair) it seems that the chances of both the long and short position going against you are high. The Pairs Trader assumes that both stocks will revert back to their mean based on number crunching historical data. I'm a newbie to pairs trading but this is my limited understanding.
Would like your thoughts on this.
I'd like to try implementing intra-day pairs for listed stocks but I want to make sure the potential profit offsets commissions. Doesn't pairs trading rely on efficient market theory, which was most notably debunked by the spectacular collapse of Long-Term Capital? Since pairs trading is inherently contra-trading (going against the trend by shorting an "overvalued" stock and buying the "undervalued" stock for each pair) it seems that the chances of both the long and short position going against you are high. The Pairs Trader assumes that both stocks will revert back to their mean based on number crunching historical data. I'm a newbie to pairs trading but this is my limited understanding.
Would like your thoughts on this.