I trade equities and some options pairs spreads. Some of the recently closed positions are ALTR/XLNX from R=0.539 to 0.60(gain of 11%) and MSFT/IBM from R=0.269 to 0.3 (gain of 10%). I presently hold 18 pairs. Ex: CTX/DHI, CECO/APOL.
Al
Pairs Trading Strategy Model
- Thread starter Neutral_Al
- Start date
I trade equities and some options pairs spreads. Some of the recently closed positions are ALTR/XLNX from R=0.539 to 0.60(gain of 11%) and MSFT/IBM from R=0.269 to 0.3 (gain of 10%). I presently hold 18 pairs. Ex: CTX/DHI, CECO/APOL.
Al
I work with several traders who trade pairs, mainly oils, gold, and banks. Oil traders have been much much more active this year and have done rather well....basing pairs on 5 day has been most successful. Golds have been a little more difficult this year and again shorter term indicators on the five day have been more profitable than running longer time period indicators. As for banks its been a banner year and one that will be tough to duplicate in the near future. Any of you guys trade oil service pairs or gold stocks? If so I would like to talk.
Chad
Chad
thats how i trade all my pairs
My group currently mentors 23 traders, with all but 1 profitable this month. Our traders are focusing on two separate strategies: scalping the mergers, or trading a portfolio of pairs. The pair portfolio has its foundation in technical analysis, supplemented by fundamental analysis. We are using a swing trading model that requires the ability to leverage larger amounts of capital (this is why we trade with Bright Trading), to create a larger portion of profitable trades.
If you want more specifics about our trading strategy visit our website at www.pairtrader.com, or if you want more information about sponsorship and mentorship email me at darrenclifford@pairtrader.com.
Cheers,
Darren
If you want more specifics about our trading strategy visit our website at www.pairtrader.com, or if you want more information about sponsorship and mentorship email me at darrenclifford@pairtrader.com.
Cheers,
Darren
Hi Djclif
Pair trading is quite interesting specially in the summer months due to smaller ranges. My concern in not trying it is that the skillset required to pair trade violates several no's no's you learn in trading 101 such as never average a loser, when u are wrong get out instead of hoping for mean reversion. Basis your experience are there traders who pair trade AND momentum trade at the same time. To me , it is sorta like practicng Karate and Tai chi at the same time.. insights are most welcome .Thanks
Do you use options to hedge "hairy" positions also...
Pair trading is quite interesting specially in the summer months due to smaller ranges. My concern in not trying it is that the skillset required to pair trade violates several no's no's you learn in trading 101 such as never average a loser, when u are wrong get out instead of hoping for mean reversion. Basis your experience are there traders who pair trade AND momentum trade at the same time. To me , it is sorta like practicng Karate and Tai chi at the same time.. insights are most welcome .Thanks
Do you use options to hedge "hairy" positions also...
thats why you have to trade pairs based on technicals as well as all that (mean and blah blah blah stuff)
pick your spots and trade
pick your spots and trade
Are most of your traders being mentored at the PairTrader.com office recent college grads? Or that age group?
GATrader:
Generally we do not trade pairs from a momentum or trend trading position. This, of course, does not mean it can not be done. Some things to consider if you wanted to pursue trend trading or momentum trading pairs: look for stocks that have trends in two separate industries (at least you diversify away from general market risk). You could mix strategies and be in one trade for momentum and one trade due to support/resistance. This way you have justifiably reduced market and sector risk. We have found it to be easier to teach a contrairian trading style to new traders.
No we do not use options. Institutions do an excellent job of pricing them so all transactions are giving the edge to the institutions.
Seisan:
Our traders vary from being young and just out of college, to sixty year olds that have been around the block a few times. Most of the younger traders we have in the m&a trading, and the older ones are into portfolios.
Cheers,
Darren
Generally we do not trade pairs from a momentum or trend trading position. This, of course, does not mean it can not be done. Some things to consider if you wanted to pursue trend trading or momentum trading pairs: look for stocks that have trends in two separate industries (at least you diversify away from general market risk). You could mix strategies and be in one trade for momentum and one trade due to support/resistance. This way you have justifiably reduced market and sector risk. We have found it to be easier to teach a contrairian trading style to new traders.
No we do not use options. Institutions do an excellent job of pricing them so all transactions are giving the edge to the institutions.
Seisan:
Our traders vary from being young and just out of college, to sixty year olds that have been around the block a few times. Most of the younger traders we have in the m&a trading, and the older ones are into portfolios.
Cheers,
Darren
I've made my way through most of this thread... congrats to all the folks who have made it work successfully. You must actually find it unfortunate that pair trading has become a fad, because the more exposure, the less profit opportunity as the market becomes more efficient.
My thinking on pair trading is this:
a) The "easy" opportunities are gone, and have been disappearing over the last few years. I have talked to someone who worked for a fund-of-funds group (allocates to hedge funds) - he commented that many stat arb / quants have been having a hard time lately. Simply because, now anyone can download a price series and calculate correlations & mean reversions in Excel, provided they have specific knowledge. Back in the 1980's it cost thousands to get the kind of data now on the internet for free. This sounds like it corresponds to the experience of many individual pair traders as well (decreased performance).
b) Given that the "easy" opportunities are gone, pairs trading is just like any other style of trading that is widely employed - eg momentum - in other words, it is *hard* to find an edge. Various strategies have their day in the sun, go away, come back, etc. The long term results of trend following CTAs bears this sort of phenomenon out...
c) I don't think I could ever bring myself to have a trading plan that requires averaging down. I know some people do it - and not saying that it will happen to all - but I think the risk that one day you get hit hard with a really big loss, that wipes out many small gains, is there (statistically, it is a strategy with a negative skew). I think new traders find pair trading appealing because it dangerously implies you can avg down with abandon, which is generally a trading no-no. (To confess, though, it's not like I have never succumbed to the urge to avg down - just that I rationally know I shouldn't)
d) Therefore, the only type of pair trading I could consider (and this is a personal statement until seeing someone's account record converts me
) is one where there are stops and no averaging down is allowed. It is fine to trade countertrend with this, same as one can trade a straight price series countertrend. It is just that you define the loss point as somewhere nearby, past support or resistance. But personally, I would rather pair trade using a trending relationship, where the benefit is that the market risk has been taken out. I would definitely consider trading stocks in different sectors against each other, or even baskets of sectors - eg the SMH vs some other ETF...
Just my thoughts & I welcome any feedback...
My thinking on pair trading is this:
a) The "easy" opportunities are gone, and have been disappearing over the last few years. I have talked to someone who worked for a fund-of-funds group (allocates to hedge funds) - he commented that many stat arb / quants have been having a hard time lately. Simply because, now anyone can download a price series and calculate correlations & mean reversions in Excel, provided they have specific knowledge. Back in the 1980's it cost thousands to get the kind of data now on the internet for free. This sounds like it corresponds to the experience of many individual pair traders as well (decreased performance).
b) Given that the "easy" opportunities are gone, pairs trading is just like any other style of trading that is widely employed - eg momentum - in other words, it is *hard* to find an edge. Various strategies have their day in the sun, go away, come back, etc. The long term results of trend following CTAs bears this sort of phenomenon out...
c) I don't think I could ever bring myself to have a trading plan that requires averaging down. I know some people do it - and not saying that it will happen to all - but I think the risk that one day you get hit hard with a really big loss, that wipes out many small gains, is there (statistically, it is a strategy with a negative skew). I think new traders find pair trading appealing because it dangerously implies you can avg down with abandon, which is generally a trading no-no. (To confess, though, it's not like I have never succumbed to the urge to avg down - just that I rationally know I shouldn't)
d) Therefore, the only type of pair trading I could consider (and this is a personal statement until seeing someone's account record converts me
) is one where there are stops and no averaging down is allowed. It is fine to trade countertrend with this, same as one can trade a straight price series countertrend. It is just that you define the loss point as somewhere nearby, past support or resistance. But personally, I would rather pair trade using a trending relationship, where the benefit is that the market risk has been taken out. I would definitely consider trading stocks in different sectors against each other, or even baskets of sectors - eg the SMH vs some other ETF...Just my thoughts & I welcome any feedback...
I generally agree with your points but you won't be able to use simple "stops" with pairs trading. You'll need something more sophisticated like a real time download of prices to Excel to allow you to calculate the price delta between pairs and then an upload to execute your stop orders.
There are still pairs opportunities out there but you have to be patient, particularly if news or other events cause a sudden shift in the relationship. I have had a high percentage of winning trades (about 95%) but the loosers have been killers. So I haven't been as active as I once was with this strategy.
There are still pairs opportunities out there but you have to be patient, particularly if news or other events cause a sudden shift in the relationship. I have had a high percentage of winning trades (about 95%) but the loosers have been killers. So I haven't been as active as I once was with this strategy.