Pairs Trading Strategy Model

Quote from goldenarm:

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.
More...
------------------------------------------------------

I am exclusively tading pairs intraday and I think it is a great strategy in the current markets which lack the momentum we had before.

There is a lot of ways to play pairs. You can trade the correlations using standard deviations and reverse to the mean. You can trade the pair like a stock applying technical analysis to it. That works great. Remember all currency trading is basically pairs trading. You can trade the trends or breakouts. Something I am developing a model for now is news pair trading. Play the news in a stock and hedge with a correlated stock without news. That has worked really well so far.

Thers is as many ways to play pairs as there is traders. Being creative helps...

Hope it helps.
 
LTCM did not fail because their assumptions/model was flawed.
They had on too much leverage to be able to withstand the positions going way too far in the wrong direction. The correlations eventually revert back, as the model says that it will, but before that happens, it goes so far the other way you get ruined in the process.

I think this is a good lesson for pairs traders. It doesn't matter about your assumptions being right. You can be "right", and still lose everything. You cannot get in too deep with leverage. BTW, basing your risk entirely on historical Std devs is dangerous as well (the infamous "fat tail problem")

Better to figure your risk based on a) time (ie. the longer you hold, the more risk you have) and b) a preset stop where you will exit the positions immediately. Historical factors too, but downplayed somewhat. (No one believes that -Past performance are no indication of future results-, anymore! :) )
 
Quote from goldenarm:

Is intra-day pairs trading worthwhile? Or is pairs more suited to swing and position trading?
...
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.
More...
I back tested S&P500 stocks for the last 5 years and found out that some pairs tend to diverse and some to reverse to mean. And for any given pair with high enough correlation that already diverse enough from mean you can say if it will tend to diverse or reverse. Win/loose ratio may differ and some months you will be negative but usually it’s from 3/1 to 4/1.
Here are some pairs I’m currently in.
I use www.pairstrading.com for charting. Are they the only ones who have free charts for pairs? Though I like RSI and MACD, I also use ADX indicator in my analysis but have to go to QCharts for it.
 

Attachments

Quote from man:

ltcm did no equity pairstrading as far as i know.
More...

No, but their whole bond arbitrage strategy was based on deviations from the mean between historically related bond-instruments. Like equity pairs, they sought to take advantage of large deviations by shorting overvalued instruments and buying undervalued ones.
 
is ANYONE making any serious money trading pairs in this current market? seems like the edge has diminished significantly with this type of trading.
 
golden
right, but if you throw all relative value trading into one basket you are way to general to make trading-relevant statements.


peace
 
Quote from man:

golden
right, but if you throw all relative value trading into one basket you are way to general to make trading-relevant statements.


peace
More...

To be more specific, is relative value intra-day pairs trading (comprised of being long one stock and short the other in a pair) a consistently profitable technique for listed equities? And is there really a "hedge" in this type of transaction? Given that there are many pairs traders who are looking at the same pairs, it would seem that good opportunities are becoming more scarce and the potential profits have narrowed too much to cover commissions. I'm not trying to dismiss this technique since I'm always looking for new opportunities, but I would like feedback from traders who are consistently successful with pairs trading (if they exist).
 
you won't find many this year i guess. our strategy on daily pairs is up only 4% and our intraday strategy is just tested, not traded so far.

we found the pairs game has become more sophisticated - well no big surprise. that's the business.


peace
 
You must log in or register to reply here.
Back
Top