ASX Stock Pairs Trade Journal

[gemtrawler]

pairs trader

.. your advice has been to pair trade large caps but I've noticed you've also been trading some smaller caps.

For instance ..

SSM, GCL, MLB, SMX

What made you choose the above stocks - and when is it appropriate to trade the smaller stocks ? ..

would you trade these smaller caps vs other small caps or against the large caps ?

 

[Pairs Trader]

guys, il get to answering all your questions after market close, just very busy now.

New trade

Long GNS @ 0.96
Short ABC @ 2.36

 

[gemtrawler]

what about BSL and OST ? .. is that a pair trade at the moment ?

 

[Pairs Trader]

Pt:

How do you decide when to average down, like the TOL & JHX pair, if you do want to? Is it based on days like the cut loss? Or based on % movement? or the running ratio that you have?

WDC & JBH pairs seem ok at the moment.

I'm not averaging down in this journal, im keeping it simple for all to see, if I do average down its when the pair has moved another 0.50+/- from my entry point on no news, nothing complicated.

 

[Sugar Dunkaton]

do you mean reducing the size of your positions if it does not initially move in your favour?

 

[Pairs Trader]

so,.. if you have a $20,000 account

does that mean that you can only commit $5,000 per pair trade (or to be exact, $2,500 on each of the stock)?

Furthermore, is that $5,000 of stock value or $5,000 of margin? ie... say if margin was 10% (on both pairs)... then your market value is really $50,000??

if you have a 20k a/c, ideally you want your position size in each stock/each leg to be between 5k-10k, so no more than 50% of your a/c in one stock. use of leverage is up to the trader, some prefer to be conservative(me) others prefer to be aggressive, to each their own.

 

[awg]

I'm not averaging down in this journal, im keeping it simple for all to see, if I do average down its when the pair has moved another 0.50+/- from my entry point on no news, nothing complicated.

do you mean reducing the size of your positions if it does not initially move in your favour?

Pls correct me if i am wrong

but i believe experienced/aggressive traders actually increase their position size if the standard deviation increases, on the basis that when the stocks return to the mean that will be a profitable strategy

 

[Pairs Trader]

do you mean reducing the size of your positions if it does not initially move in your favour?

averaging down, layering both mean increasing/adding to your position.

 

[Pairs Trader]

Yes that is correct. Each position in its own right is a good trade, your looking for stocks that are overbought/oversold relative to the market for no good reason, by placing 2 opposing trades at the same time we remove market and sector risk which only leaves stock specific risk, sometimes it can be hard to find the reason a stock has moved, you have to hunt around, for example last week I shorted James Hardie(JHX) because it went up on no news, however upon closer look, on thursday night in the US, news came out that US sales were up 3.4%, better than expected, which helps the industry JHX operate in, this happened after I placed the trade, however if I was more careful I would have noted that upcoming news item and its potential effect on the stock and have not placed the trade, doesn't matter though, Im still learning everyday myself. It pays to look at what happens in the US, as the rest of the world mostly follow their markets with 70% of worldwide liquidity being transacted there.

Hi PT

Just so that I understand what you wrote above correctly...

See attached image.

1) Comparing XJO against ASX100 stocks
2) Filtered the result for values >2 OR <-2
3) Select two stocks in the same sector that are on the opposite ends... ie in the example attached I'd be pairing the financials; AMP(-2.04) with QBE(+2.40) ??

4) backtest that pair to see if they correlate well then...

5) if all good, then I guess you would go Long and AMP and Short on QBE?

 

[craig18278]

PT could you confirm I see in your screen shot of your pair trade finder that you have version 2.3c, is this available yet.

Also the data in your view of PTF seems different to mine. I see a std dev for this pair of 0.74 for 24/07 and 2.0 for today with not enter trade signal. Is yours set up differently.

 

[Pairs Trader]

just about all of your significant losses come from news being released that affects the stock after you have placed your trade, to mitigate this risk make sure the stock doesn't have upcoming earnings annoucements, stock sensitive pending announcements or any clouding market rumours, sometimes the reason is unknown, you do have to do some homework, it takes me no longer than 5mins to search for stock news for multiple sources, this is where a full service stockbroker can help, he is your man on the street and can let you know what the market talk is on any given stock.

To reduce your losses try employing a 15 day time stop and close your position within this timeframe regardless of PnL, also you can try sticking to stocks that have a history of very few stock price sensitive news items, BHP would be the opposite of this example and I don't trade it, too many variables at play, ADRs, governments, contracts, etc.....very hard stock to trade. If you position size correctly you can takes losses no problem, you have it to be able stomach the losses and not take it personally or give reason to change your method, this is why succesfull trading flies in the face of how we are brought up to function, if we do something and its wrong that we need to change how we did it, whereas in trading this doesn't apply, you make more money from sitting on your hands than ''doing something''.

Its a numbers game, treat it just like that, numbers, don't measure your losses in the material equivalent like I just lost $500, that a nice weekend holiday gone, try and trade with the attitude, ''right im going to make 100 trades over the next 3months and I don't care if I breakeven, it will be a good experience and I will learn alot'' going in with this attitude is good because your not expecting fireworks and any profit is going to please you.

Remember this is speculating, making an educated bet, not science. Trading is not placing a trade then thinking there might be a chance of a loss but it always turns into a winner for some sort of cheap thrill, you have to take losses, learn to love them, and treat like one step closer to another winning trade.

Hi pair traders,

about 8 to 9 out of 10 trades I take are winners. At the first glance thats pretty good. But the bad thing is, that the losing trades reduce my profits by 50%, or sometimes even more. Do you have any advice to get around of that?

Much thanks in advance!

Saico

 

[Pairs Trader]

I was thinking about this today, and if I remember correctly wasn't your first ever trade on here Pairs BHP/RIO after BHP announced that it was dropping its takeover bid? Surely that trade was based on news? Have you changed your method since then?

Yes that is a type of trade I don't do in this journal, im keeping it very simple for everyone to see. I do take trades outside this journal in other markets too.

That trade was news biased, RIO got smashed down what I thought was too much for the known information at the time, and I bet against the market, I did make a small profit and got out too early, but it didn't turn out well as I thought it would. I don't recommend these type of trades for inexperienced trader, when you have been watching the market day in day out for years you develop a ''feel'' for it and if you pay particular attention to a handful of stocks you know when they are out of whack even when there has been news released, this is where trading becomes very similar to playing poker, Greg Coffey in London is the king of this game, its the old ''buy on rumor, sell on the news'' except Greg buys before rumor and sells on the rumor, front running everyone because he is intimately in touch with the market, also he is very very intelligent which helps.

 

[Pairs Trader]

http://www.youtube.com/results?search_query=trader+paul+tudor+jones&search_type=&aq=f

The above link is the movie ''trader'' made in 1987, its a documentary on the legendary trader Paul Tudor Jones, one of the best traders in the world with the most respectable long term records, the movie is in 7 parts and is a great insight into a real hedge fund manager daily life, he is managing 100m at that time, he gamed the '87 crash and made bucket loads in a time everyone else was staring into the abyss. Be sure to watch the movie soon as it was only uploaded 24 hours ago and may not remain there long as its rumored Paul brought all remaining copies of this doc because he thought it discloses too much. Great watch.

 

[Pairs Trader]

yes SSM is a stock I probably shouldn't be trading in this journal, I mostly stick with stocks in the ASX200, rarely venture out of the ASX300. I recommend staying within the ASX100 if possible, generally the larger the stock is the more safe it is, and I do mean generally.

pairs trader

.. your advice has been to pair trade large caps but I've noticed you've also been trading some smaller caps.

For instance ..

SSM, GCL, MLB, SMX

What made you choose the above stocks - and when is it appropriate to trade the smaller stocks ? ..

would you trade these smaller caps vs other small caps or against the large caps ?

 

[Pairs Trader]

PT could you confirm I see in your screen shot of your pair trade finder that you have version 2.3c, is this available yet.

Also the data in your view of PTF seems different to mine. I see a std dev for this pair of 0.74 for 24/07 and 2.0 for today with not enter trade signal. Is yours set up differently.

Please PM me for instructions on how to download and install the latest version, its still in BETA, it works fine though.

 

[johnnyg]

Yes that is a type of trade I don't do in this journal, im keeping it very simple for everyone to see. I do take trades outside this journal in other markets too.

That trade was news biased, RIO got smashed down what I thought was too much for the known information at the time, and I bet against the market, I did make a small profit and got out too early, but it didn't turn out well as I thought it would. I don't recommend these type of trades for inexperienced trader, when you have been watching the market day in day out for years you develop a ''feel'' for it and if you pay particular attention to a handful of stocks you know when they are out of whack even when there has been news released, this is where trading becomes very similar to playing poker, Greg Coffey in London is the king of this game, its the old ''buy on rumor, sell on the news'' except Greg buys before rumor and sells on the rumor, front running everyone because he is intimately in touch with the market, also he is very very intelligent which helps.

Thanks for clearing that up Pairs.

Regards John

 

[Barndat]

http://www.youtube.com/results?search_query=trader+paul+tudor+jones&search_type=&aq=f

The above link is the movie ''trader'' made in 1987, its a documentary on the legendary trader Paul Tudor Jones, one of the best traders in the world with the most respectable long term records, the movie is in 7 parts and is a great insight into a real hedge fund manager daily life, he is managing 100m at that time, he gamed the '87 crash and made bucket loads in a time everyone else was staring into the abyss. Be sure to watch the movie soon as it was only uploaded 24 hours ago and may not remain there long as its rumored Paul brought all remaining copies of this doc because he thought it discloses too much. Great watch.

Thanks PT for the YouTube link, I'm sure it will be entertaining to say the least...

 

[saico]

just about all of your significant losses come from news being released that affects the stock after you have placed your trade, to mitigate this risk make sure the stock doesn't have upcoming earnings annoucements, stock sensitive pending announcements or any clouding market rumours, sometimes the reason is unknown, you do have to do some homework, it takes me no longer than 5mins to search for stock news for multiple sources, this is where a full service stockbroker can help, he is your man on the street and can let you know what the market talk is on any given stock.

To reduce your losses try employing a 15 day time stop and close your position within this timeframe regardless of PnL, also you can try sticking to stocks that have a history of very few stock price sensitive news items, BHP would be the opposite of this example and I don't trade it, too many variables at play, ADRs, governments, contracts, etc.....very hard stock to trade. If you position size correctly you can takes losses no problem, you have it to be able stomach the losses and not take it personally or give reason to change your method, this is why succesfull trading flies in the face of how we are brought up to function, if we do something and its wrong that we need to change how we did it, whereas in trading this doesn't apply, you make more money from sitting on your hands than ''doing something''.

Its a numbers game, treat it just like that, numbers, don't measure your losses in the material equivalent like I just lost $500, that a nice weekend holiday gone, try and trade with the attitude, ''right im going to make 100 trades over the next 3months and I don't care if I breakeven, it will be a good experience and I will learn alot'' going in with this attitude is good because your not expecting fireworks and any profit is going to please you.

Remember this is speculating, making an educated bet, not science. Trading is not placing a trade then thinking there might be a chance of a loss but it always turns into a winner for some sort of cheap thrill, you have to take losses, learn to love them, and treat like one step closer to another winning trade.

Thanks for the great comments on my question, Pairs! Its very appreciated.

Saico

 

[gemtrawler]

PT

i'm just trialing your software.

- on the pilot view mode - I notice that only about half of the pairs have charts, so i can't do the necessary analysis on them (i.e. there's no correlation chart, running mean average charts etc..).

i also note that most of the ones you've traded do have charts.

So is it a risk trading the pairs that are uncharted ?

Also with these uncharted pairs is the correlation % that's given accurate and up to date ?

 

[Pairs Trader]

Exited trade for profits

Sold TOL @ 6.86 (10.64% profit)
Covered JHX @ 4.94 (6.92% loss)