ASX Stock Pairs Trade Journal

[Pairs Trader]

New trade

Long MLB @ 2.02
Short IRE @ 6.61

Still wishing I was on the water....

 

[tatankov]

New trade

Long CTX @ 9.98
Short AOE @ 3.93

Cracker of a day up here in Queensland, should be out on the water

That is one trade i would skip.
You are going against a uptrending ratio.

 

[tatankov]

PairsTrader,

Do you usually look at pair backtesting, before entering the trade?
How important is to you?

 

[daCoops]

Hi All, I've been following a few people who have been using this software (including yourself, and a guy called jonnysharp on elitetrader.com forum)

I too have taken a look at the 30 day trial, and am impressed at the possible trades it shows up (papertrading only).

I would like to start using it, but do not have a great amount of funds to invest - so I'm expecting to simply make very little profits, a few pounds above the commision. (I'm UK based btw)

My question is whether its best to use PairTrading with a CFD account or a Spread Betting account? Can someone more pro than myself give a few tips with respect to Pair trading using Spread bets / CFD's

Many thanks!

 

[skc]

Hi All, I've been following a few people who have been using this software (including yourself, and a guy called jonnysharp on elitetrader.com forum)

I too have taken a look at the 30 day trial, and am impressed at the possible trades it shows up (papertrading only).

I would like to start using it, but do not have a great amount of funds to invest - so I'm expecting to simply make very little profits, a few pounds above the commision. (I'm UK based btw)

My question is whether its best to use PairTrading with a CFD account or a Spread Betting account? Can someone more pro than myself give a few tips with respect to Pair trading using Spread bets / CFD's

Many thanks!

I think the bigger issue is the size of your capital. Pairs trading (PT) with a small account puts you at a VERY significant disadvantage.

1. PT is commission-hungry. You pay 4 times for every trade. If you are looking at small position sizes, the minimum commission might be as high as 1 or 2 percent. UK trading around GBP10 minimum? Yuck.

2. PT doesn't look for large profit. You need to take consistently small profits. With more trades, the commission drag will be higher.

3. PT doesn't employ stop loss. 2 bad trades at the beginning means you have no capital left, especially if you leverage with spread betting / CFD. In fact, you may not have enough capital to cover the margin, so your broker close you down before the trade comes back in your favour.

4. Using CFD puts you at other disadvantages if you are with a market maker. The spread you pay on entry and exit also eats away your profits significantly. Not to mention interest expense, esp if you are stuck in a flat/losing trade.

Take the 20 or so trades listed here and apply the position size and commissions you have in mind, and see how your returns suffer with a small account.

 

[Pairs Trader]

Exited two trades this morning, both for profits

Sold NWSLV @ 11.50 (1.56% loss)
Covered NWS @ 13.21 (4.08% profit)

Sold CTX @ 10.16 (1.80% profit)
Covered AOE @ 3.80 (3.42% profit)

22 Wins
1 Scratch
1 Loss

 

[Pairs Trader]

That is one trade i would skip.
You are going against a uptrending ratio.

Yes its quite subjective the ratio filter, I guess has their own take on it, personally Ive seen thousands of ratio charts so I guess I have a well trained eye, however the trade is already closed for a profit. The less time in a trade the less risk.

 

[Pairs Trader]

PairsTrader,

Do you usually look at pair backtesting, before entering the trade?
How important is to you?

Not for individual trades, about every several months I will delete all my pairs off the radar, do fresh backtests and add new pairs, most of the good one will be re-added. Over time some pairs can decline in correlation and the fundamental relationship can change due to new information affect the respective business models and share prices. For example a favourite pair of mine for a long time was AMP/AXA, always had high correlation of 90% or above, a perfect sideways trending ratio chart, clean and robust signals, only needed to hold for a day or two for it to return to the mean, but then the pair changed last year, AMP became a lot stronger than AXA, correlation broke down and I removed the pair from my radar. I treat every pair and signal the same, it has to pass through several filters before I execute the trade, my general rule of thumb is, I look at the analysis window, analysis the charts, basically just look at each one for 5 seconds, if Im not convinced within 30 seconds, that is still considering the trade after 30 seconds I will not take the trade, usually the best trades pop out at you, and you know without a doubt its the type of trade you want to be in.

 

[Pairs Trader]

I too have taken a look at the 30 day trial, and am impressed at the possible trades it shows up (papertrading only).

I would like to start using it, but do not have a great amount of funds to invest - so I'm expecting to simply make very little profits, a few pounds above the commision. (I'm UK based btw)

My question is whether its best to use PairTrading with a CFD account or a Spread Betting account? Can someone more pro than myself give a few tips with respect to Pair trading using Spread bets / CFD's

Many thanks!

I would opt for a CFD account, however there's plenty of guys using it on spreadbetting accounts successfully. Most of us down here use CFD's, Americans aren't allowed by law to trade CFDs, so most of them are using IB or prop accounts, we are very lucky to be able to trade equities with leverage, this is still a new concept.

A couple of thousand pound a/c should be enough for your commissions to be within an acceptable % level of your gross profits. Ideally you don't want your commissions to be more than 30% of your gross profits, mine is around 8%, some think if you have a strong edge up to 70% of your gross profits can be spent on commissions, personally that's out of my comfort zone and I would feel sick how much dollars I would be making the broker.

 

[tatankov]

I would opt for a CFD account, however there's plenty of guys using it on spreadbetting accounts successfully. Most of us down here use CFD's, Americans aren't allowed by law to trade CFDs, so most of them are using IB or prop accounts, we are very lucky to be able to trade equities with leverage, this is still a new concept.

A couple of thousand pound a/c should be enough for your commissions to be within an acceptable % level of your gross profits. Ideally you don't want your commissions to be more than 30% of your gross profits, mine is around 8%, some think if you have a strong edge up to 70% of your gross profits can be spent on commissions, personally that's out of my comfort zone and I would feel sick how much dollars I would be making the broker.

What broker would you suggest?
What is the average spread+comission on CFD's?

 

[daCoops]

Hi All,

Thanks for the advice guys with respect to the CFD vs Spread Betting. I've been taking a look at the various brokers and things, and think that I'm going to go ahead with CMC Markets and Spread Bettingoption to start out. It should be a good option, especially with an initial account of only about 1000.

I've checked, and minimum account is only £200, theres no commission on the trades, they require only aroun 3 - 5% margins for UK stocks, and the spreads seem tighter than IG Markets for example...

Will simply give it a go and see what happens - I'll try to post my pair trades but I'm not promising anything... (although will try to post some summaries once im on the go)

 

[beamstas]

It should be a good option, especially with an initial account of only about 1000.

You wont be just paddling upstream with this amt
You'll be paddling up a waterfall, with no paddle!

I'd suggest looking at other methods with small capital

Pairs trading you can't really let profits run, you are taking small fast profits and paying 2x the brokerage

As opposed to longer term where you are only paying 1 lot of brokerage much less frequently

There will still be pairs trades next week.. next month.. next year.. next 10 yrs..

 

[skc]

Hi All,

Thanks for the advice guys with respect to the CFD vs Spread Betting. I've been taking a look at the various brokers and things, and think that I'm going to go ahead with CMC Markets and Spread Bettingoption to start out. It should be a good option, especially with an initial account of only about 1000.

I've checked, and minimum account is only £200, theres no commission on the trades, they require only aroun 3 - 5% margins for UK stocks, and the spreads seem tighter than IG Markets for example...

Will simply give it a go and see what happens - I'll try to post my pair trades but I'm not promising anything... (although will try to post some summaries once im on the go)

Couldn't help but to have a quick look at CMC Spread Betting website. No commission and 0.075% fixed spread on FTSE100 equities. That's actually not bad at all. The spread roughly equals commission in percentage terms, but works for a small account as they have no minimum charge.

Sure you can't profit big time with a grand, but you can learn a lot hopefully.

Good luck.

BTW - if you do post your trades, consider starting a new thread.

 

[Pairs Trader]

New trade

Long LGL @ 3.23
Short SGX @ 6.03

 

[akzidenz]

@Pairs Trader, great thread, thank you for posting all this information, I enjoy keeping up with it.

You have posted your win/loss/scratch stats, but not number of trades open. Are you running any unrealised losses in there?

Also, as you've now been doing this journal for almost 3 months, would you have the time to prepare a summary of trading during that quarter, with slightly more info? I hope that doesn't sound onerous and doesn't need to be. I'm just very interested to know things like biggest/average/total: win/loss %; days in market; exposure; and anything else.

Keep up the great work here, and I wish you profitable trading!

 

[Truth]

Pairs Trader,

Good Morning from Atlanta. I have a question. Is it reasonable for a trader to trade this method on an end of day basis, placing orders at night to be filled at the open? Or, do they need to be placed intraday?

 

[So_Cynical]

Hey pairs

First time ive looked at this thread

Long LGL @ 3.23
Short SGX @ 6.03

As a long term Gold watcher and investor i can see where this combination
comes from...also can see how the short could go very very wrong.

By backing 2 stocks arnt u doubling the risk...u need 2 directions to go your
way...i find getting one stock to move my way hard enough.

GL

 

[MRC & Co]

By backing 2 stocks arnt u doubling the risk...u need 2 directions to go your
way...i find getting one stock to move my way hard enough.

Yes, it is infact doubling the risk, but at the same time, 'hedging' it. If that makes sense? If the spread continues to blow out, you are going to take a beating on both sides of the equation, but it is market neutral at the very least, and Pairs uses a rolling mean and I think a 1 standard deviation exit at times, so at the very least, he has some form of exit strategy.

Pure mathematical correlations.

 

[So_Cynical]

Yes, it is infact doubling the risk, but at the same time, 'hedging' it. If that makes sense?

Pure mathematical correlations.

There is a real casino - roulette element to that, the mathematics and hedging.

I suppose success is super dependent on the entry timing and stock selection.

 

[Pairs Trader]

@Pairs Trader, great thread, thank you for posting all this information, I enjoy keeping up with it.

You have posted your win/loss/scratch stats, but not number of trades open. Are you running any unrealised losses in there?

Also, as you've now been doing this journal for almost 3 months, would you have the time to prepare a summary of trading during that quarter, with slightly more info? I hope that doesn't sound onerous and doesn't need to be. I'm just very interested to know things like biggest/average/total: win/loss %; days in market; exposure; and anything else.

Keep up the great work here, and I wish you profitable trading!

I only have 3 open positions and my index pair trade on AXJO vs N225 is slightly down. Im up 36% since starting this journal, includes both closed and open equity. My win rate is 91% and win:loss ratio is 1.31. Average trade length is several days. I usually only have 1-3 positions open at any given time. I trade very conservatively and keep overall portfolio risk and exposure levels very low.