Some "Bright" strategies...

Originally posted by lescor
take your data, input it into a spreadsheet, then use that to find a moving average of the mean price and different levels of deviation from the mean. You could then calculate probabilities of how far prices would deviate to different levels before retracing.
More...

I go into a rather detailed exlpaination of how I did this on my website. Email me with any questions.

http://www.iwinfree.com/pairs.htm

Also here is the link for a past discussion on pairs:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=1921
 
pairs trading seems interesting.. just for fun i took a peek at the VIA/AOL pair suggested by Hitman.. i took 2200 bars of 15minuite data.. using the open price of each bar, i calculated the % difference.. then i created a 20 bar MA of the deviation.. then i calculated the difference between the actual deviation for that bar and the 20 bar moving average.. this chart sucks, but it illustrates the point that the idea has merit if you account for the movement of the MA and trade with its trend.. im going to spend some time experimenting with the idea..

-qwik
 

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back to AOL/VIA.. i created an indicator based on the 200ma of the divergence.. the idea being that a move over 1.10 or below .90 indicate a temporary divergence and therefore signal a trading opportunity.. here are the results of the last 10 trades if each trade was taken and held until the indicator returned to 1..

10-05-00 Short AOL 61.61 Long VIA 46.00
10-17-00 Cover AOL 46.00 Sell VIA 46.93
+15.61 and -11.32 for total of +4.29

10-18-00 Long AOL 44.50 Short VIA 52.50
11-06-00 Sell AOL 56.03 Cover VIA 58.31
+11.53 and -5.81 for a total of +5.72

11-21-00 Long AOL 44.37 Short VIA 53.50
12-11-00 Sell AOL 47.97 Cover VIA 54.12
+3.60 and -.62 for a total of +2.98

12-20-00 Long AOL 38.21 Short VIA 49.12
1-08-00 Sell AOL 40.03 Cover VIA 50.93
+1.82 and -1.81 for a total of +.01

1-19-01 Short AOL 52.88 Long VIA 58.43
2-2-01 Cover AOL 48.05 Sell VIA 56.40
+4.83 and -2.03 for a total of +2.80

2-21-01 Long AOL 44.35 Short VIA 53.64
3-5-01 Sell AOL 43.65 Cover VIA 48.40
-.70 and +5.24 for a total of +4.54

4-18-01 Short AOL 47.84 Long VIA 48.50
4-23-01 Cover AOL 46.25 Sell VIA 52.35
+1.59 and +3.85 for a total of +5.44

7-26-01 Long AOL 43.41 Short VIA 49.14
8-28-01 Sell AOL 40.67 Cover VIA 45.14
+4.00 and -2.74 for a total of +1.26

9-18-01 Short AOL 31.25 Long VIA 31.85
10-08-01 Cover AOL 31.62 Sell VIA 34.68
-.37 and +2.83 for a total of +2.46

11-02-01 Long AOL 32.20 Short VIA 38.65
11-08-01 Sell AOL 36.40 Cover VIA 40.51
+4.20 and -1.86 for a total of +2.34

thats 10 trades, 9 positive and 1 even..

total gain = 31.84 or 3.18 per trade..

remove the first 2 trades for a 1 year sample.. total gain is 21.83

brand new guy walks into trading firm and plops down 25k.. 10-1 margin.. max position is 2245 shares on most expensive position.. end of year he made $49,008.35 minus 1,796.00 commissions.. or $47,212.35.. max intra-trade drawdown of about $8328.95.. not too shabby.. especially considering he was in the market for just 132 days..

any comments or insight on things i might have overlooked would be appreciated.. ill include the charts below..

-qwik
 

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qwik-
Thanks for the posts...good stuff...do you use Realtick at all? I remember them adding a new charting feature that is usefull in pairs trading, but I'll have to put more time into investigating it...
if anybody else has more info on the RT3 charts or pairs trading in general this could really turn out to be a good thread. or we can just start another thread titled "pairs trading"

"she asked the wrong question...'what are you thinking?'":cool:
 
Here are some specifics for you guys from last week. I hope "hitman" doesn't mind my sharing his email to me on the board.

This is a message from Hitman at Elite Trader's message board (
http://www.elitetrader.com/vb/index.php ).
------------------------------------------------------------------------

Don:

I have looked at chart after chart of AOL/VIA and a few other pairs I have, my biggest question
is how exactly do you trade a spread intraday. Can you give one, JUST ONE example on why
you took a trade, that will be incredibly helpful.

I really spend a lot of time looking at how I can possibly make use of a pair relationship and I
really really need just one example to link together the pieces.

--------------------------------------------------

Don't get too caught up in all the technicals (trading is as "simple as you'll let it be, or as difficult as you want to make it" ..Don Bright quote...:-) Since we trade in and out of several leading pairs many times during the day, and use a simple risk calculation for any overnights, we can rely on our basic "entry & exit points"...anyway, here is an example of my trades from last week.

K, you watch AOL/VIA trade for the last few days and you see that it has been in a price
differential between 3.50 and 6.80 for example (actually it has). As it (the pair) was rising in price, nearing 6.00, I sold VIA short when I saw the overall market weakening, and repurchased it at a
lower price....several times. This is the "hard" side (since you have to sell short unless you buy bullets
or have a conversion), and when I wasn't able to buy VIA back (say the market reversed and the
VIA (bid/ask) spread widened to the upside, I would buy AOL...thus "selling the spread" for around $6.00....I
repeated this a few times (both the intraday selling short and covering, and the adding to the overall
position. I ended up with 3 units (at 2,000 shares each) of the Spread. I sold it at $5.80, $6.31, and
6.88 I believe. Now we reverse the logic when the differential starts to narrow. I purchased the
spread that I sold for 6.88 for 6.25, the 6.31 and the 5.80 for around 5.00 or so ( sure, I could've
waited for a better price, but the spread could just as easily begin to widen again. Very simple
strategy, but it does take some time to execute properly and requires applying an "envelope" of buy and sell orders all day long.

Hope this helps!
 
Don,

I have been semi-critical of some of your earlier posts, so I wanted to post a positive one when I saw something I like. This last post of yours is something I can respect. This is the purpose for these boards, to enlighten traders for the betterment of us all.

With posts like the one above, I say welcome. If they stay focused on trading like that, who can say anything that is negative. I will have to look at the AOL/VIA that you mention, I have not played that before.

-Jim
 
Thanks for the kind words, Jim. I really do try to be helpful in any way I can, and hope that we can all grow a viable industry, not just a single firm, or a single strategy. :)
 
Don,

I said this on another thread but I'll repeat it here: I had some fun at your expense because you seemed to be merely self-promoting, but now I see you are trying to help people. Thanks and look forward to more from you.
 
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