Trading individual legs off of a pair trade?

[fika]

Does anyone ever model spreads/pairs and only trade one of the legs? I have been doing it for the past 2 months and it has been working really well. I just wanted to see if others incorporate such analysis into their strategies.

The idea of the strategy does make sense as you are buying an equity that is oversold from the perspective of its relationship with similarly correlated equities. So if I find a company I like from a fundamental perspective; I will make some spreads using similar companies and only go long that stock when that spread is oversold. It has helped tremendously with my entry prices that I take in a stock.

What does ET think of such an approach? Maybe this could be a helpful tweak to your strat or is it rubbish?

 

[onemoreshot]

If it's working really well and you're making money awesome, who cares if some lame ET'r who prob doesn't even trade live thinks. Keep on keeping on.

 

[Jack_Larkin]

 

[fika]

Oh I hate it when you give me that look Chan man

@onemoreshot Thanks for the kind words.

 

[eurusdzn]

I remember a couple respected ETers mentioning that spread trading equities can be a poor allocation of capital. Maybe you are a good directional trader.

 

[fika]

It can be a poor allocation of capital depending on the market we are in. Overall, I think it is a good strategy for the risk averse.

In my case, I am trying to take an existing idea and apply it in a non-traditional way. More than anything, I am looking for like-minded individuals who are familiar with statarb and who have experience trading this way. My only concern is that there are not many who know of such an approach.

 

[eurusdzn]

Actually, i think their point was to highlight the low margin required for exhange traded spreads vs. equity spreads however it does seem to require twice the capital
for lower volatility whereas most seem to actively seek volatility.
My example of this would be QQQ-SMH for reversion to mean. Paint drying but ok
with me. Understand i am not a trader, just talking here.

 

[eurusdzn]

It can be a poor allocation of capital depending on the market we are in. Overall, I think it is a good strategy for the risk averse.

In my case, I am trying to take an existing idea and apply it in a non-traditional way. More than anything, I am looking for like-minded individuals who are familiar with statarb and who have experience trading this way. My only concern is that there are not many who know of such an approach.

Just my humble opinion but i think you have found a method that is working in this market. You are are punishing the shorts by selecting the most oversold of peers
(Spreads becomimg more oversold) and dropping the hedge.
Can this selection method be tested in a different market environment?
Of course say/state if i am missing the point and maybe more experienced will join in.
Good trading to you.

 

[tom_czr]

It can be a poor allocation of capital depending on the market we are in. Overall, I think it is a good strategy for the risk averse.

In my case, I am trying to take an existing idea and apply it in a non-traditional way. More than anything, I am looking for like-minded individuals who are familiar with statarb and who have experience trading this way. My only concern is that there are not many who know of such an approach.

I am statarb guy... Actualy my system works the way, that it ususally trades pairs, but it can also trade long only and short only individual stocks - all beta hedged...

 

[1245]

Does anyone ever model spreads/pairs and only trade one of the legs? I have been doing it for the past 2 months and it has been working really well. I just wanted to see if others incorporate such analysis into their strategies.

The idea of the strategy does make sense as you are buying an equity that is oversold from the perspective of its relationship with similarly correlated equities. So if I find a company I like from a fundamental perspective; I will make some spreads using similar companies and only go long that stock when that spread is oversold. It has helped tremendously with my entry prices that I take in a stock.

What does ET think of such an approach? Maybe this could be a helpful tweak to your strat or is it rubbish?

You are doing better because the market has been going straight up. If we get a downdraft, you will wish you hedged your strategy. If you choose not to hedge, I would consider smaller overnight position.