ASX Stock Pairs Trade Journal

[VSntchr]

BTW, what do you mean 1, 2 or 3%?

Leg size to % of trading account. When I'm in full swing I'm doing more like 6% - 20% depending on the pair.

It's up 80 pts so not that slow... but I am struggling to understand the strength. I read something like the average trader on Wall Street has only 5 years experience and never faced a rate rise... makes you question whether the "market" actually knows anything!

Yeah, up a fair bit...but it did most of those 80 points pretty quickly...10:30am to 4pm was about a 10 point range - back to the good old boring days!
I haven't traded in a rate rising environment, actually my only experience within a rate rising environment was when I was in high school and I remember getting excited that my ING savings account interest rate was going up every few months. 6% return from a bank account, that really had me feeling like a wheeler and dealer :cowboy:

I was watching the market with an early interest back in those days..and did have some small investments, but no proper trading experience...so the next market phase (as always) will be interesting for me.

 

[skc]

Pairs trading by Ellerston Capital hedge fund.

http://www.afr.com/business/banking...kes-banks-and-falling-markets-20150924-gjttqw

In his pair trading strategy, Mr Drzewucki will pick two companies that tend to move up and down together simultaneously and take a "short" position in one and a "long" position in the other. The short or long selection will be made based on which company's shares appear to be outperforming or underperforming their potential at any given time.

"Pairing gives us the opportunity to remove the industry risk and the market risk and focus on creating alpha based on which is the better of the two companies," he explained.

On average, an Ellerston trade will last only 20 days and then it is onto the next pair.

And perform it has: For the year to the end of August, Ellerston Australian Market Neutral Fund returned 12.94 per cent (9.6 per cent net of fees) while the ASX/S&P200 returned 2.3 per cent.

The Ellerston fund had produced a positive return 13 out of the 15 months the market had produced a negative return over the past four years, Mr Drzewucki said, highlighting the fund's ability to perform in falling markets.

 

[DeepState]

Pairs trading by Ellerston Capital hedge fund.

http://www.afr.com/business/banking...kes-banks-and-falling-markets-20150924-gjttqw

Paul is an awesome guy. Had his own fund before joining Ashok Jacob. Monterey. Glad you found him. You guys should meet...and I would like to be there. He leverages off the fundamental team as well, run by Chris Kourtis.

 

[VSntchr]

Pairs trading by Ellerston Capital hedge fund.

http://www.afr.com/business/banking...kes-banks-and-falling-markets-20150924-gjttqw

I wonder what software they use for watching ratio and correlation. Likely something the in-house quants built I guess.
Interesting read, thanks SKC.

 

[sinner]

I wonder what software they use for watching ratio and correlation. Likely something the in-house quants built I guess.
Interesting read, thanks SKC.

Most serious quants of any discipline are using MATLAB, or more recently adopting the open source R.

R has some open source packages you can install, like quantmod and PerformanceAnalytics.

That's what I use (R+quantmod+PA). With the packages installed, these days I can do in about 10 lines of R what used to take me at least 100-200 lines in python.

 

[VSntchr]

My guess is that nothing will really come of it for at least the immediate future (6-12 months)... so a short term oversold for me. FWIW I have a long CCP pairing with a short in CLH. CCP is down ~18% whiel CLH is only down ~6%.

Thought I'd bring this here.
I am jealous you had borrow for this one. Was one of the main trades I wanted today! Also tried PNC for the short with no luck. Considered TGA but its already pretty battered on other issues.

That aside, finally got some momentum going with the pairs portfolio today. Despite the volatile market swings I've been pretty slow until today.

 

[skc]

Thought I'd bring this here.
I am jealous you had borrow for this one. Was one of the main trades I wanted today! Also tried PNC for the short with no luck. Considered TGA but its already pretty battered on other issues.

That aside, finally got some momentum going with the pairs portfolio today. Despite the volatile market swings I've been pretty slow until today.

Don't have a lot of CLH borrow so position is pretty small. Not to mention both CCP and CLH are thin at the best of times.

 

[VSntchr]

Article exploring pairs trading and the relevant parameters by head of Macro strategy from Saxo bank.

Has Pairs Trading had its day?

 

[skc]

Article exploring pairs trading and the relevant parameters by head of Macro strategy from Saxo bank.

Has Pairs Trading had its day?

Thanks for the link. They did a lot of work to reach a pretty useless conclusion.

Pairs trading is arguably still alive, but the returns are not great and they vary quite a bit across time. Expressed more precisely, pairs trading worked reasonably well in the aggregate in the 2003-2015 period provided that you had selected the correct parameters. Parameters, mind you, which may not be stable going forward.

Especially the bold part. If that's the expectation (of stable parameters) then it is bound to disappoint! Markets are dynamic, sectors are dynamic, companies are dynamic, even the simple action of buying and selling changes over time.

A pairs strategy study using a static set of parameters over 13 years is simply an incorrect way to approach trading imo.

As we both know, this pairs trade thread has been on this forum for over 6 years... it has attracted the interest of many over this time. Yet there are probably less than a dozen people who's made it work. It says clearly that there is more to trading pairs than just a set of numbers.

 

[VSntchr]

Thanks for the link. They did a lot of work to reach a pretty useless conclusion.

Agree. If anything it gives the learning pairs trader an idea of what kind of parameters are involved. Beyond that, pretty useless.

Especially the bold part. If that's the expectation (of stable parameters) then it is bound to disappoint! Markets are dynamic, sectors are dynamic, companies are dynamic, even the simple action of buying and selling changes over time.

A pairs strategy study using a static set of parameters over 13 years is simply an incorrect way to approach trading imo.

As we both know, this pairs trade thread has been on this forum for over 6 years... it has attracted the interest of many over this time. Yet there are probably less than a dozen people who's made it work. It says clearly that there is more to trading pairs than just a set of numbers.

Do you change your parameters for each sector quite often?
Personally I do make small changes every few months depending on volatility. And I also make some changes to lookback around traditionally slower periods (where there are also a number of non trading days) such as Xmas and Easter.

Also as you touched on, the other obvious read-through is that a big part of successful pairs trading is through knowing the market and your basket of stocks well in order to know when to avoid signals etc.

 

[skc]

Do you change your parameters for each sector quite often?

No... but I think I sort of do it in my head. I apply discretion to how I enter... waiting for an extra tick or two, or layer in over a few days, when it looks like there could be more divergence etc.

To be honest I don't know if what I do is optimal. If I ever get the time I should probably review it a bit more quantitatively.

 

[skc]

Also as you touched on, the other obvious read-through is that a big part of successful pairs trading is through knowing the market and your basket of stocks well in order to know when to avoid signals etc.

LLC offers a great example today. It's been underperforming other REITs for quite some time... a benign investor update sparked a nice rally today, which generated a few signals to short the stock against other REITs.

But I didn't take the trades because I know that LLC is simply playing catch up. The PTF signal is based on the share price action of the past 2-3 weeks, but LLC is still underperforming over the last quarter. So there's potentially a lot of upside yet. I might even trade it long as a pair and ignoring the PTF ratio altogether. There isn't any PTF parameter you can change to help make these kinds of decisions.

P.S. I took a long trade this morning and it was THE easiest trade to hold and build. The bids kept stepping up and there was basically no pull back along the way. Just the perfect trend for 1.5 hours running 70c.

 

[VSntchr]

LLC offers a great example today. It's been underperforming other REITs for quite some time... a benign investor update sparked a nice rally today, which generated a few signals to short the stock against other REITs.

But I didn't take the trades because I know that LLC is simply playing catch up. The PTF signal is based on the share price action of the past 2-3 weeks, but LLC is still underperforming over the last quarter. So there's potentially a lot of upside yet. I might even trade it long as a pair and ignoring the PTF ratio altogether. There isn't any PTF parameter you can change to help make these kinds of decisions.

P.S. I took a long trade this morning and it was THE easiest trade to hold and build. The bids kept stepping up and there was basically no pull back along the way. Just the perfect trend for 1.5 hours running 70c.

Indeed a perfect example.
I got the first step correct by avoiding all of the LLC signals...knowing it was just playing catchup...but failed to think about a potential trade to the longside.
A good example of Master and Apprentice perhaps, haha.

I did see the chart later in the day yesterday and noticed that lovely trend. Part of what puts me off with LLC presentations is the huge amount of content - I wonder, what will I miss in here?!
Looked good again today with a rising market and gap up, until the RBA came out and toppled the newly refound confidence in pre-sales :bricks1:

 

[skc]

I did see the chart later in the day yesterday and noticed that lovely trend. Part of what puts me off with LLC presentations is the huge amount of content - I wonder, what will I miss in here?!
Looked good again today with a rising market and gap up, until the RBA came out and toppled the newly refound confidence in pre-sales :bricks1:

Believe it or not I didn't read the whole thing either... but it was obvious that, once the uptrend started, whatever it was that market was concerned with LLC got alleviated. As I said, the trend was soooo perfect and it allowed me to pyramid into a solid position size (I think I bought 8-9 times over the first few minutes). If someone was to sweep it down 8c along the way then I would have thought "what did I miss in the presentation?".

A good example of Master and Apprentice perhaps, haha.

We are just peers mate... from what I've seen you are just as good (if not better) a trader!

 

[VSntchr]

New on the list: BPT/DLS, been onto this one for over a month and finally caught it

Ummm - did the market forget that this opened at 11am today!
That was easily my fastest pair of the year

Probably still left too much on the table, but happy to take 6% in 6 minutes!

 

[SilverRanger]

Ummm - did the market forget that this opened at 11am today!
That was easily my fastest pair of the year

Probably still left too much on the table, but happy to take 6% in 6 minutes!

I'm lining up for more, this one has the potential to be the next AMM/VOC, but not sure about being another NVN/FDC though

 

[VSntchr]

I'm lining up for more, this one has the potential to be the next AMM/VOC, but not sure about being another NVN/FDC though

I blew up on AMM/VOC - dont say that!
NVN/FDC, that one brings back sweet sweet reversion memories :dance:

 

[skc]

Ummm - did the market forget that this opened at 11am today!
That was easily my fastest pair of the year

Probably still left too much on the table, but happy to take 6% in 6 minutes!

I have had long DLS / short BPT on and off... but obviously the deal would be announced when I don't have any position.

But the open was just free money

Closed half now but the gap is still 4.5% when it's probably a done deal due to close in 3 months.

 

[craft]

What are you guys thoughts on VOC/MTU? The spread doesn’t yet seem to be narrowing as time passes.

Is it still within the realm of normal for an all stock merger or are there other issues weighing?

Doubts over ACCC approval?
Is VOC a potential target itself?
Shortage of VOC borrow?
Worries over MTU stand alone if it doesn’t proceed?

Thoughts appreciated.

 

[VSntchr]

What are you guys thoughts on VOC/MTU? The spread doesn’t yet seem to be narrowing as time passes.

Is it still within the realm of normal for an all stock merger or are there other issues weighing?

Doubts over ACCC approval?
Is VOC a potential target itself?
Shortage of VOC borrow?
Worries over MTU stand alone if it doesn’t proceed?

Thoughts appreciated.

I'll leave the insightful answers to the other guys.
But for context here's the discount since offer announced. Based from 30m intra-day data.