three way pair trading using ES,NQ,YM

E

eyedy

I've been reading pair trading related posts on ETrader site and wanted to ask question.

Anybody thought about intraday three way pair trading method?

For example, let's say there are three highly correlated stocks, ABC.

At 9:30 AM, A is up 0.9%, B is up 0.3% and C is up 0.1%

Difference between A and B(0.6%) is larger than the difference between B and C(0.2%)

1. A/B pair: Short A and long B on equal dollar basis assuming 0.6% gap will decrease

2. B/C pair: long B and short C on equal dollar basis assuming 0.2% gap will increase

so you have short A, short C and long B positions which are market neutral on total dollar basis.

Maybe it can be applied to index futures as well? (ES, NQ, YM)
 
Well in stock you can go long
SSO ultra long
SDS ultra short u are well hedged in stocks

For futures
GO long YM and short
NQ

Depending on the situtation
 
I'll go with ES and YM. One sht and one long.

One strat. is do simultaenous mkt orders. Of course you
get reduced perf bond as well...but more commish.
A few little problems crop up though.:D
Like just when to pull the hedge on the loser.
Manual trading - you're often gonna have to work real fast.
Sim trade it.
 
Crap idea. ES and YM are highly correlated, meaning you will have to put on as many NQ positions as you have from the others combined.
Proper pairs trading is usually done with ES and YM (short one, long the other) and yes you can you use the TT autospreader, but it is not necessary. Also be careful of blowout days where both instruments can tank.
 
I don't think you need that many NQ contracts for this. it depends on each future's gap.

for example, at the open, let's say NQ is up 0.9% ES is up 0.5% and YM is up 0.4%

you are betting that NQ/ES will converge relative to ES/YM

so, you would have 3 open positions: NQ short, ES long, and YM short (ES position size would be large enough to cover both NQ and YM long to maintain market neutral)

this three way combination changes depending on how much each index changed compared to yesterday's closing value.

it's just an idea, i never backtested yet. anybody actually traded this way?
 
Quote from eyedy:

I don't think you need that many NQ contracts for this. it depends on each future's gap.

for example, at the open, let's say NQ is up 0.9% ES is up 0.5% and YM is up 0.4%

you are betting that NQ/ES will converge relative to ES/YM

so, you would have 3 open positions: NQ short, ES long, and YM short (ES position size would be large enough to cover both NQ and YM long to maintain market neutral)

this three way combination changes depending on how much each index changed compared to yesterday's closing value.

it's just an idea, i never backtested yet. anybody actually traded this way?
More...

just wondering, in your hypothetical case, why are you going to short YM when it is up the least as opposed to only short NQ against both YM and ES? and where does TF fit into the picture or not liquid enough?
 
Quote from colonelangus:

just wondering, in your hypothetical case, why are you going to short YM when it is up the least as opposed to only short NQ against both YM and ES? and where does TF fit into the picture or not liquid enough?
More...

NQ up 0.9% ES 0.5% YM 0.4%

you need to divide this into two groups of pair NQ/ES and ES/YM

now you have two numbers 0.4%(0.9%-0.5%) and 0.1%(0.5%-0.4%)

and you are basically betting that these two numbers will converge sooner or later.

in order for 0.4% to decrease, you short NQ and long ES.
in order for 0.1% to increase, you long ES and short YM.

so you will have short NQ long ES and short YM positions.

at the end of the day, if you have ES more in the middle of NQ and YM in terms of % move, then you will get profit from this position regardless of overall market direction.

obviously, english is not my first language and I hope you get the idea.
 
Quote from eyedy:

NQ up 0.9% ES 0.5% YM 0.4%

you need to divide this into two groups of pair NQ/ES and ES/YM

now you have two numbers 0.4%(0.9%-0.5%) and 0.1%(0.5%-0.4%)

and you are basically betting that these two numbers will converge sooner or later.

in order for 0.4% to decrease, you short NQ and long ES.
in order for 0.1% to increase, you long ES and short YM.

so you will have short NQ long ES and short YM positions.

at the end of the day, if you have ES more in the middle of NQ and YM in terms of % move, then you will get profit from this position regardless of overall market direction.

obviously, english is not my first language and I hope you get the idea.
More...

hey bro, your english is great for a second language (i have a second language and i read it at a first grade level after 10 years so...)

i get your basic idea but i believe the reasoning is a little bit off because the difference between ES and YM favors the probability of ES coming back down that one percent instead of the other way around IF you are thinking that the pair will revert to the mean (all things being "normal" without a few S&P stocks just breaking out that are not in the Dow or one of the 30 tanking where it would be a much greater % of the YM, etc.).
to put it another way, if you come up with your numbers like that, short-long then it should be .4% and -.1% so that with them returning to zero, you would be losing that 1% on YM.
of course, that doesn't mean it will work and perhaps adding a few TF contracts to the mix may help as YM and ES are almost too correlated to feel truly diversified which i am guessing is your objective?
either way, good luck and good job thinking outside the box, have fun with it:D
 
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