Pairs trading

Quote from intradaybill:

Pairs trading is not based on corellation. It is based on cointegration. I have warned a few people before but they did not listen. Now they cry after they had to liquidate their funds.

http://en.wikipedia.org/wiki/Cointegration
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hi there, i remeber you from another thread. you are the skeptic.
that's good, i'm a skeptic myself :mad:

the 'novartis long/switzerland etf short' pair trade (paper trade) is going against me, down about $170. it's a paper trade.

some paper trades have been more successful, like

BA short
DIA long

ABX short
EWC long

XLE short
USO long

BHP short
EWA long

so this is showing a mixed picture so far. i'm trying to use visualization tools (finviz, market trac) to detect tradable situations on the radar screen. but i'm not looking at ratios yet, and i know i should.

i have no rational explanation why the novartis trade is going against me. and that worries me. novartis had a huge spike, and i shorted it against the swiss index etf. the short novartis position has gained something, but long switzerland lost more. there you go.

this means caution, caution, caution, like with trading in general.
'market-neutral' has a soothing tone to it, but you can lose money. i think the losses are smaller and less abrupt than in an outright position, but they occur. and if you're stubborn, they can probably be large.

food for thought, in any event, i think it's a good idea to look at the spread value, where it is in terms of the bollinger bands, or kettler channels.

i'm still interested in pairs trading, but i'm really disturbed by this novartis thing, because i am no have the explanation for it . ..
 
Quote from Ms Varima-Garch:

this means caution, caution, caution, like with trading in general.
'market-neutral' has a soothing tone to it, but you can lose money.
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Well, I warned you about the Novartis trade. Good thing it is only a paper trade.

One thing I can tell you:

"A true market-neutral startegy makes no money by definition"

It is another misnomer like "hedge funds". It is basically an attempt in prospectus to fool investors. they say things like:

"Our trading approach is based on proven low risk market-neutral startegies"

BS, I say. You can neutralize unsystemic risk but systemic risk cannot be neutralized. Novartis can outperform the local index longer than you can stay solvent.
 
well, let's not rush to conlusions yet. the jury is still out on the novartis trade. if it were a real trade, i would've closed it for a loss, probably, and the loss would've been locked in forever.

i'll give the paper trade some more time, because it's only been a couple of days. and i think you want to use time stops with this, 5-10 days maybe, i don't know.

other trades have been fantastic though (e.g., BA short/DIA long), and it once again confirms what a great trader i am (in my own eyes of course).

gummy stuff: i'm using it and it's ok. it no make bad to my computers
 
Quote from Ms Varima-Garch:

gummy stuff: i'm using it and it's ok. it no make bad to my computers
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Are you sure? Real bad things do not leave traces, are hard to detect and also look like good things (explorer.exe for example). Some people get their kicks buy installing backdoors in software and monitoring people's lives. Backdoors are extremely difficult to detect especially if they open at random times.

I do not download anything anymore unless it comes from a company I know, they have a physical address and they have been around for a while. I won't go again through hard disk reformat, it's a bad experience.
 
Quote from intradaybill:

Well, I warned you about the Novartis trade. Good thing it is only a paper trade.

One thing I can tell you:

"A true market-neutral startegy makes no money by definition"

It is another misnomer like "hedge funds". It is basically an attempt in prospectus to fool investors. they say things like:

"Our trading approach is based on proven low risk market-neutral startegies"

BS, I say. You can neutralize unsystemic risk but systemic risk cannot be neutralized. Novartis can outperform the local index longer than you can stay solvent.
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i don't know where you get your misinformation but you seem to appear on every pair related post spewing frothy feces about a strategy that you clearly know nothing about.

maybe it's semantics, but people can make money in true market neutral strategies by having their longs go up more than their shorts or longs go down less than their shorts. what is your definition of "true market neutral," to be long and short the SAME stock?

do you know what systemic risk is? with a portfolio of pairs, systematic risk is neutralized because you have an equal amount of short $ compared with long so if the market tanks (i.e. the market/systemic risk), you should be OK.

just because you know people that have lost lots of money with pairs doesn't mean that some people are not making consistent profits with the strategy. just look at JonnySharpe's thread, a lot of them are making consistent coin and that is just one way to do it.
 
Quote from jones247:

Excellent post... many folks have lost their "shirts" bettiing on reversion to mean between two pairs, when in fact it's better to simply long the strong stock and short the weak stock as a hedge. Many employ a layering strategy, which works until it DOESN'T!!! And when it fails, you lose big due to the adverse risk:reward ratio.

Walt
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Why would anyone lose their shirts unless they overloaded their entire portfolio into one set of pairs. In that case there is nothing wrong with the strategy but the decision of the investor to put 100% of their portfolio in one pair and when it backfired they lost everything. People point to GM/F as an example but for those that traded that pair it should just be one losing pair in a portfolio and nothing to make you BLOW UP.

I do not understand the argument that you could blow up on a losing pair. If that is true then that is horrible risk management not a horrible strategy. Every strategy has its merits if used properly.
 
i agree with colonelangus in that i like the pairs concept. if you buy somethin, you gotta sell somethin . ..

taking an outright long or short position in something basically means making a bet and keeping you fingers crossed . . .

again, losses occur, but i think they are smaller and less abrupt in pairs, probably. so people tend to use time stops, because mean reversion can take time to mature

of course you really need to know what you're doing. psychology is very impotant, you need to have a lot of emotional discipline, and especially be able to relax and focus when times are tense

again most of the paper trades with pairs i've made so far, about 7, have been successful. it's not a bullet-proof method of trading and it's not risk-free

but mean reversion is a recognized idea, even by 'random walkers'. things do tend to revert to their mean, and there are some laws of gravity in the markets, although they are not absolute.

i think it's important to visualize your trading success and really conquer your fears. you need to unleash inner.

in any event, i'm going to get chan's book on algo trading. i don't think it's overloaded with technical stuff.

my preliminary impression is that pairs trading is an interesting way to trade, based on mean reversion, a recognized effect in financial markets. if stock go far away from another, it go back.

it's not an asnwer to all questions, you're not going to become bill gates from one month of pairs trading, but it's an excellent way to spend time. and that's what trading is to me: a way to spend my time.

we really need to find a way to heal our wounds from our past trading mistakes. you may have traded on emotion, or forgot what your edge was, or had too much coffee and bought too many contracts. now is the time to relax

keep your mind circular, and your body triangular. lose yourself in the deep mountains and quiet valleys and bind yourself to the life-generating ki of yin and yang. in such an aiki state, you can accomplish anything, even the most difficult task. if you are settled deep within yourself, nothing in daily life will be able to shackle you.
 
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