ASX Stock Pairs Trade Journal

[skc]

hi guys,

like many here, enjoying following this thread.

anyone using ib for their pairtrading? I'm using mqprime's cfds currently but am keen to move across for a number of reasons, not the least being significantly lower commisisions.

if you are using ib, do you use stocks or cfds (i assume these are the asx exchange traded ones..) ?

thanks,

drew.

I use IB for all the long legs of my pairs trading. Low commission and lower interest. As IB is a margin account, interest is paid on the borrowed funds rather than the full position size.

I only trade stocks with IB. ASX CFDs are too illiquid. However, if you are capital constrained you may have no choice.

Bochman, there are many threads that specifically discuss IB. Go read those. The general consensus is that it is good and suitable for more experienced, frequent traders.

 

[dr3wfish]

thanks skc, thats what i was after. I had heard there isn't much liquidity with asx cfds.

two more for you:
- if you use ib for the long leg, what do you use for the short leg?
- does ib only offer 50% on overnight positions? (i have looked on the ib site for margin rates on aus stocks but can't say i came away with a definitive answer..)

hadn't really thought about mixing platforms ie mqprime cfds for shorts, ib for longs.

 

[skc]

thanks skc, thats what i was after. I had heard there isn't much liquidity with asx cfds.

two more for you:
- if you use ib for the long leg, what do you use for the short leg?
- does ib only offer 50% on overnight positions? (i have looked on the ib site for margin rates on aus stocks but can't say i came away with a definitive answer..)

hadn't really thought about mixing platforms ie mqprime cfds for shorts, ib for longs.

I use IG DMA for short leg.

As with IB margins - I am actually a bit vague on that also. I never really had to worry about it as I rarely borrow anything close to 10% of my account.

 

[dr3wfish]

I use IG DMA for short leg.

As with IB margins - I am actually a bit vague on that also. I never really had to worry about it as I rarely borrow anything close to 10% of my account.

am i reading this right - IG commissions 0.1% with $8 minimum for DMA? not bad for the small time trader.

thanks again for your assistance.

 

[TraderDownUnder]

am i reading this right - IG commissions 0.1% with $8 minimum for DMA? not bad for the small time trader.

thanks again for your assistance.

Yes, you are right. IG commissions are 0.1% with a minimum of $8 of up to $10,000. I use IG for both long and short legs.

 

[Pairs Trader]

Exited trade

Sold WDC @ 12.08 (7.18% profit)
Covered JBH @ 17.05 (3.02% loss)

passed on long SGP/WDC since SGP is reporting full year results next Wednesday.

 

[Sugar Dunkaton]

Jared,

I have version 2.50727, but i dont have that triggers page.. which i think has been a great addition to the product - which version contains this feature.

Thanks

 

[gemtrawler]

PT I've also emailed Jared the same questions..

1. Do you have a list of say top 50 proven (over time) reliably
correlated ASX pairs ?

Also there's a lot of critical decision making and it's hard to make a
call on some trades..

for instance ..

I'm getting strong negative deviation signals for BEN (a small bank)
whose share price is strengthening relative to QBE (an insurance
company which has had a recent announcement that it's buying a stake
and rescuing a heavily indebted company Elders - i see this as a
positive but the market doesn't agree)

My thought process is .. it's a smaller bank vs a leading insurance
company ,, both in the finacial sector but nevertheless very different
areas.
there's also the recent announcement with QBE which should have
possibly been received positively by the market, but wasn't?

These stocks could now be diverging for the longer term rather than
deviating from their previously correlated mean - and so becoming
unpredictable ?

So ..
2. How do you pick the best pair trades .. and distinguish between a
good/reliably predictable trade and a new longer term divergence which could throw all the past correlation data and a prior predictable correlation out the window ?

Also we're approaching/entering right now the current Full Year
reporting season with a lot of surprises in store .. so what happens
to past correlation data - is that going to be relevant going forward
post reporting ?

3. Is it safe to pair trade right now during the reporting season? ..
and if not when is the best time ?

 

[cooper1308]

PT I've also emailed Jared the same questions..

1. Do you have a list of say top 50 proven (over time) reliably
correlated ASX pairs ?

Also there's a lot of critical decision making and it's hard to make a
call on some trades..

for instance ..

I'm getting strong negative deviation signals for BEN (a small bank)
whose share price is strengthening relative to QBE (an insurance
company which has had a recent announcement that it's buying a stake
and rescuing a heavily indebted company Elders - i see this as a
positive but the market doesn't agree)

My thought process is .. it's a smaller bank vs a leading insurance
company ,, both in the finacial sector but nevertheless very different
areas.
there's also the recent announcement with QBE which should have
possibly been received positively by the market, but wasn't?

These stocks could now be diverging for the longer term rather than
deviating from their previously correlated mean - and so becoming
unpredictable ?

So ..
2. How do you pick the best pair trades .. and distinguish between a
good/reliably predictable trade and a new longer term divergence which could throw all the past correlation data and a prior predictable correlation out the window ?

Also we're approaching/entering right now the current Full Year
reporting season with a lot of surprises in store .. so what happens
to past correlation data - is that going to be relevant going forward
post reporting ?

3. Is it safe to pair trade right now during the reporting season? ..
and if not when is the best time ?

Just my two cents, take it or leave it...

PTF seeks stat arb trading opportunities. Put simply it seeks price deviations between two correlated stocks ideally with no recent sensitive news.

Punters get confused between pair trading and the good ole' long/short. Recent news events will often be the catalyst for a long/short whereby stat arb (or pair trading) will try as hard as possible to avoid fundamentally event driven trades.

So as you can see, on the surface they look very similar, but in actual fact both strategies are completely different.

In your BEN/QBE example, you've tried to justify the trade using the principals of long/short investing, when the entry was triggered by a stat arb program. We are looking to avoid news, not seek it.

Im not saying the trade isn't legit...Could well be a cracker!!!..it's just a hard/confusing game to play when crossing borders. The way the human mind is conditioned is if the trade moves against you'll simply have more reasons to justify staying in it. Trying to keep the process as simple as possible I have found is the key.

Me? I say "F$%K the news" :cowboy:

 

[gemtrawler]

cooper1308 we are in the reporting season so my point is there will be a lot of pair trade arbs coming up as a result of FY announcements or imminent FY announcements and or market expectations.
It's unavoidable.

Is now therefore a bad time to pair trade ? - as news(fresh or imminent) would inevitably now be a catalyst for arbs.

i.e. Can you still find reliable pair trades right now ? .. if not when should pair trading resume.

and how relevant is past correlation data going forward as pairs that have shown a strong past correlation may now set new trends based on their FY results?

 

[cooper1308]

You've missed the point...

cooper1308 we are in the reporting season so my point is there will be a lot of pair trade arbs coming up

There will be alot of long/short opportunities.... Again, classic stat arb will avoid news . I am not implying one is better than the other, merely stat arb will generally avoid earnings season / news in general..

..........as news(fresh or imminent) would inevitably now be a catalyst for arbs.

Again, it will be the catalyst for long/short, not arbs

i.e. Can you still find reliable pair trades right now ? .. if not when should pair trading resume.

This is for you to decide... If you are long/short then I would imagine earnings is when the majority of your trades are being generated. I'd also assume this the time to be scanning over reports/events and seeking fundamentally strong(weak) stocks to pair against weak(strong) stocks.

Because I trade stat arb, i'll generally use this time to test/review procedures. Statistics carry less weight through earnings therefore, you guessed it, I will avoid trading using statistics. I pass the time by adding/deleting pairs, extensivley backtesting exit strategies, improving price excecution systems ect ect ect...

There are 100000000000000000000000 ways to pair trade and often punters (such as the author of this thread) will use both stat arb and long/short.... However I think it is important to understand the difference between the two

 

[Pairs Trader]

yeah spot on cooper, I trade per normal through earnings, I just tip toe around the release dates, often you can find good opportunities around earnings time, also look out for the post earnings price drift which statistically happens more often after earnings then random time frames, especially after surprise earnings a stock price can begin a new strong trend.

I encourage the more experienced traders or guys who have read this journal from the beginning to answer questions aswell just like cooper has, I appreciate the time it saves me from repeating myself and allows me more time to further develop the software we all use.

 

[gemtrawler]

thanks cooper

I understand the difference between the 2 trades - but this forum is about stat arbs - and that's what I'm concentrating on here.

I guess I'm essentially questioning the relevance of the correlation data as it's looking back over an extended period - in view of the fact that the latest earnings report and even a single price sensitive recent announcement can throw an instant spanner in the works.

So there may be pairs that are given a strong 80 or 90% correlation by the software program that may essentially be no longer correlated... and should no longer even be considered a pair.

How do we determine which pairs indeed remain correlated and to what extent?

And even if you are not trading during this reporting season as you say, how do you determine the
best correlated pairs and the relevance of the data when you do start to trade again - as you would still be largely looking at past correlation data - that's inescapable.

 

[lips1977]

thanks cooper

I understand the difference between the 2 trades - but this forum is about stat arbs - and that's what I'm concentrating on here.

I guess I'm essentially questioning the relevance of the correlation data as it's looking back over an extended period - in view of the fact that the latest earnings report and even a single price sensitive recent announcement can throw an instant spanner in the works.

So there may be pairs that are given a strong 80 or 90% correlation by the software program that may essentially be no longer correlated... and should no longer even be considered a pair.

How do we determine which pairs indeed remain correlated and to what extent?

And even if you are not trading during this reporting season as you say, how do you determine the
best correlated pairs and the relevance of the data when you do start to trade again - as you would still be largely looking at past correlation data - that's inescapable.

Hey mate,
I have been trying to learn a lot about stat arb since the commencement of this thread (what can I say - I'm an engineer), so I'll have a stab at answering this.

The only way that correlation data can be generated is by looking back through historical data. Only by analysing the way that prices have moved in relation to each other over an extended period of time can an accurate assessment be made of whether or not there is a statistical relationship between the two equities.

Indeed, it has been previously mentioned that the backtesting ability of the software will be enhanced to greater than 12 months - which will then allow for correlation to factor in previous reporting periods.

You are indeed quite right that price sensitive announcements may have a significant impact on short term price movements - but by this logic you could argue that all technical analysis is inherently questionable. After all, whether you use trends, breakouts, support and resistance, whatever - always you are relying on analysis of prior price movements and "hoping" that any identified patterns are repeated.

As PT has mentioned a number of times - this is a numbers game. By determining a high previous correlation, the numbers suggest that the probabilities are high that prices will move together in the future. However, nothing is guaranteed - and all this method does is provide an mathematic edge - as with any other analytical method - which can then be exploited through appropriate application of money management techniques.

You are right - it is inescapable that you are looking at past data - but as with any mathematical technique all you are trying to do is put the odds in your favour by identfying as strong relationship and betting / speculating / gambling that that relationship will continue into the future.

 

[cooper1308]

thanks cooper
I understand the difference between the 2 trades - but this forum is about stat arbs - and that's what I'm concentrating on here.

Ok i'm a little confused. You want to focus on stat arb yet write 4 paragraphs on the fundamental similarities between QBE/BEN? If your focusing on stat arb I will again answer your question in relation to earnings. IGNORE and AVOID (sorta like herpes:run.

in view of the fact that the latest earnings report and even a single price sensitive recent announcement can throw an instant spanner in the works.

What difference is this to being long or short a stock in the first place? Earnings will always throw a spanner in the works (unless ofcourse you have a proven edge in trading into earnings, which is a different kettle of fish). If anything risk is significantly lower trading pairs into earnings when compared to outright long or short.

So there may be pairs that are given a strong 80 or 90% correlation by the software program that may essentially be no longer correlated... and should no longer even be considered a pair.

How do we determine which pairs indeed remain correlated and to what extent?

And even if you are not trading during this reporting season as you say, how do you determine the
best correlated pairs and the relevance of the data when you do start to trade again - as you would still be largely looking at past correlation data - that's inescapable.

I think you are putting to much emphasis on correlation. It is only one piece of the pie. Sexy ratio charts and extreme % from means I feel are just as, if not more important. When all these (+other factors you will notice after solid screen time) come together you'll soon develop a feel for good trades. It comes a little more intuitive.

 

[auric]

agree cooper here is a chart of the qbe/ben which i would use to make a decision on the trade, pf is a very good tool which i find saves a lot of time data mining ,
wish i was a bit more sql savvy to link the chart program to the database might be a good upgrade for pf developers.
great thread

 

[Pairs Trader]

closed trades

Sold ABB @ 8.90 (1.57% loss)
Covered CSR @ 1.815 (3.12% loss)

Sold FXJ @ 1.47 (5.00% profit)
Covered APN @ 1.81 (1.40% loss)

 

[dr3wfish]

Is anybody else having serious problems with the data not being current?

None of my ASX stocks will update past 5/08 which is driving me insane.

I also get consistent unhandled exceptions complaining about 'Object reference not set to an instance of an object'. I suppose i should raise these issues in the pair trader forums (and i will) however they don't seem to be frequented to often..

 

[marlon]

PT, ultra-newbie here...

Been following a couple of your recent trades. Would the ABC/GNS pair be a prime example of when you might average down? Given no change in the fundamentals or pending announcements, and with the price movement of ABC, it would appear a compelling case (and a low-risk strategy?) to average down at least with that half of the pair.

Of course this is all with the benefit of hindsight now that they are back to a fairly neutral price position.

 

[Sugar Dunkaton]

AS far as i can tell, they are not really in a "neutral price position" since the trade was entered - I think they have both moved unfavourably.