Quote from total_keops:
lol
Look at SPY:IVV, IAU:GLD, ... there is no pairs trading intraday?
The Problem comes with them being .98 "POSITIVELY" correlated. For pairs trading to work, you need nearly perfect "NEGATIVE" correlation. You shouldn't expect any security to be under or overvalued relative to the other security when they both move in the same direction. My pairs model still works on these securities, but it's not very robust at the 30 minute level.
In fact at the 30 minute level, my pairs model on IVV and SPY without modifications has these results:
Long + Short Long Only Short Only Buy & Hold
Starting Capital $57,000.00 $57,000.00 $57,000.00 $57,000.00
Ending Capital $57,245.19 $57,245.19 $57,000.00 $52,161.01
Net Profit $245.19 $245.19 $0.00 $-4,838.99
Net Profit % 0.43% 0.43% 0.00% -8.49%
Annualized Gain % 0.08% 0.08% 0.00% -1.62%
Exposure 0.72% 0.72% 0.00% 100.00%
Number of Trades 26 26 0 1
Avg Profit/Loss $9.43 $9.43 $0.00 $-4,838.99
Avg Profit/Loss % 0.02% 0.02% 0.00% -8.49%
Avg Bars Held 5.50 5.50 0.00 19,050.00
Winning Trades 15 15 0 0
Winning % 57.69% 57.69% N/A 0.00%
Gross Profit $1,125.65 $1,125.65 $0.00 $0.00
Avg Profit $75.04 $75.04 $0.00 $0.00
Avg Profit % 0.14% 0.14% 0.00% 0.00%
Avg Bars Held 5.73 5.73 0.00 0.00
Max Consecutive 4 4 0 N/A
Losing Trades 11 11 0 1
Losing % 42.31% 42.31% N/A 100.00%
Gross Loss $-880.46 $-880.46 $0.00 $-4,838.99
Avg Loss $-80.04 $-80.04 $0.00 $-4,838.99
Avg Loss % -0.14% -0.14% 0.00% -8.49%
Avg Bars Held 5.18 5.18 0.00 19,050.00
Max Consecutive 4 4 0 N/A
Max Drawdown $-904.23 $-904.23 $0.00 $-44,788.80
Max Drawdown % -1.57% -1.57% 0.00% -57.27%
Max Drawdown Date 6/29/2007 6/29/2007 N/A 3/6/2009
Wealth-Lab Score 10.85 10.85 0.00 -2.55
Profit Factor 1.28 1.28 0.00 0.00
Recovery Factor 0.27 0.27 N/A 0.11
Payoff Ratio 0.95 0.95 0.00 0.00
Sharpe Ratio 0.18 0.18 0.00 -0.03
Ulcer Index 0.26 0.26 0.00 19.29
Wealth-Lab Error Term 0.15 0.15 0.00 12.50
Wealth-Lab Reward Ratio 0.52 0.52 N/A -0.13
Luck Coefficient 3.50 3.50 0.00 0.00
Pessimistic Rate of Return 0.74 0.74 0.00 0.00
Equity Drop Ratio 0.00 0.00 0.00 -3.93
Not that robust, but at the daily level, they have these results:
Long + Short Long Only Short Only Buy & Hold
Starting Capital $57,000.00 $57,000.00 $57,000.00 $57,000.00
Ending Capital $72,087.08 $72,087.08 $57,000.00 $51,982.40
Net Profit $15,087.08 $15,087.08 $0.00 $-5,017.60
Net Profit % 26.47% 26.47% 0.00% -8.80%
Annualized Gain % 4.43% 4.43% 0.00% -1.69%
Exposure 4.14% 4.14% 0.00% 100.00%
Number of Trades 25 25 0 1
Avg Profit/Loss $603.48 $603.48 $0.00 $-5,017.60
Avg Profit/Loss % 1.00% 1.00% 0.00% -8.78%
Avg Bars Held 2.36 2.36 0.00 1,364.00
Winning Trades 22 22 0 0
Winning % 88.00% 88.00% N/A 0.00%
Gross Profit $19,628.92 $19,628.92 $0.00 $0.00
Avg Profit $892.22 $892.22 $0.00 $0.00
Avg Profit % 1.47% 1.47% 0.00% 0.00%
Avg Bars Held 1.86 1.86 0.00 0.00
Max Consecutive 15 15 0 N/A
Losing Trades 3 3 0 1
Losing % 12.00% 12.00% N/A 100.00%
Gross Loss $-4,541.84 $-4,541.84 $0.00 $-5,017.60
Avg Loss $-1,513.95 $-1,513.95 $0.00 $-5,017.60
Avg Loss % -2.45% -2.45% 0.00% -8.78%
Avg Bars Held 6.00 6.00 0.00 1,364.00
Max Consecutive 1 1 0 N/A
Max Drawdown $-1,976.70 $-1,976.70 $0.00 $-43,945.59
Max Drawdown % -2.95% -2.95% 0.00% -56.62%
Max Drawdown Date 7/8/2008 7/8/2008 N/A 3/9/2009
Wealth-Lab Score 103.79 103.79 0.00 -2.64
Profit Factor 4.32 4.32 0.00 0.00
Recovery Factor 7.63 7.63 N/A 0.11
Payoff Ratio 0.60 0.60 0.00 0.00
Sharpe Ratio 1.20 1.20 0.00 -0.04
Ulcer Index 1.06 1.06 0.00 19.14
Wealth-Lab Error Term 1.59 1.59 0.00 12.54
Wealth-Lab Reward Ratio 2.79 2.79 N/A -0.13
Luck Coefficient 2.36 2.36 0.00 0.00
Pessimistic Rate of Return 2.19 2.19 0.00 0.00
Equity Drop Ratio 0.00 0.00 0.00 -3.35
Not bad. Good PF, marginally high Sharpe, good win percentage, but with a statistically insignificant amount of trades. However, given that I haven't modified the program I normally use for QID and QLD, good nonetheless. My advice still stands for this person. Use daily, not intraday in your strategy. You shouldn't have to worry about bid/ask spreads or commissions when pair trading.
The problem with the time frame comes from the fact that you keep crossing under and crossing back over the fair value range. I would agree at the small level, there's not enough entry into an overvalued range to give enough of a profit margin intraday, thus why you must look at daily time frames.
To summarize, the main problem with intraday time frames is that as soon as you cross that magic level of oversold or overbought, you buy, no matter how insignificant that discount from fair value is. So if you are looking at a 5 minute chart, and it goes below your fair value by a penny, then you put in the trade on for that penny, which I can then understand why there would be issues of trading costs. But if you are at the daily level, and it goes below the fair value by a couple percent, THEN, you have a much more robust system.
The thing I've always noted with the look of the ratios in positively correlated pais, is that they move too sharply, and you need a negatively correlated pair to "smooth" the series out so that when one goes down, the other goes up, and you lose the choppiness of the ratio. This advice is quite valuable, but, of course, assumes the OP knows what to do with it.
) pool and let IT do the matching and appropriate reroutes for me it could really make an impact on profitability. In that sense, the project could really be of great interest as it is both profitable in itself and could marginally improve conditions for its users.