ASX Stock Pairs Trade Journal

[marlon]

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.

Well, GNS has pretty much remained around a cent or two of entry price but the morning of my post ABC was back at 2.36 after hitting 2.47 the previous day (and then up to 2.52 yesterday).
My question of PT was that as they had diverged even more from the initial trigger point, was this not a typical example of when he might average down, with ABC in this case, and indeed then pick up some small profits along the way before final exit?

 

[cooper1308]

Well, GNS has pretty much remained around a cent or two of entry price but the morning of my post ABC was back at 2.36 after hitting 2.47 the previous day (and then up to 2.52 yesterday).
My question of PT was that as they had diverged even more from the initial trigger point, was this not a typical example of when he might average down, with ABC in this case, and indeed then pick up some small profits along the way before final exit?

It's been mentioned in order to keep things simple, "layering" will not take place in this journal...

However, you would layer this particular trade assuming it moved past your pre-determined parameters. A trade that moves against you quite significantly might not always constitute another "layer" as the mean ratio it is benchmarked against is not static.

So to answer your question...Generally if the move was big enough and pushed the SD past layer 2, with no news...then yes I guess you would add another layer....if not then no. But we don't know what PT parameters are

 

[saico]

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.

IB as data provider for PTF would be great. I'm also trading with IB. No complaints at all.

 

[samgribbles]

PT - no new trades for 2 weeks?

 

[n5032245]

fellow pair traders and pair trade finder,

i have a suggestion for an upgrade to the software and wanted to guage the forum's/PTF's response.

One of the major pitfalls (in my eyes) of the platform is the delay between the actual share price (live) and what is updated either though yahoo finance or IQ data feed. how many times have we seen an exit/entry signal go off, but the share price has already retreated.

a way to naviagate this problem could be a small addittion to the program. specifically, a small box on the 'analyse pair' tab that allows you to enter one share price (eg CBA $35) and for the program to calculate what the other share price (eg ANZ) would have to be for the +/- to equel zero (ie. an exit signal).

i for one watch all my trades and when they look like getting close i make an educated guess as to what this would be. an exact calculation would not only be a simple addittion (for PTF), but would be overly helpful.


all comments welcome.

Regards,

Charles

 

[manuelg]

Since I work full-time, i cannot use the pairtrade software during the day and have been experimenting with using EOD data to find suitable pairs and then attempting to get a similiar or better price the next morning. Sometimes this results in missed trades, sometimes it also helps avoid extreme price changes. An example of a trade that presented itself at close yesterday was "short FLT@11.80, long TEN@1.30". While TEN has remained steady, FLT has rocketed to 13.56! In the opinion of those who have been doing this longer than I, does this now make it an even more appealing trade, or is this 15% movement an indication that they should no longer be used as a pair? (looking at the graphs from yesterday correltation is very high, with reasonable looking % from mean and spread charts - spread trending, % from mean oscillating).

 

[Sugar Dunkaton]

I would suggest that yesterdays movement on FLT was purely news related and this system is based on non-news related deviations.

 

[manuelg]

That was my thought also. However, many share price movements could by considered news related. Is the best policy to only trade pairs if there has been no news recently and no expectation of news in the near future?

 

[cooper1308]

Since I work full-time, i cannot use the pairtrade software during the day and have been experimenting with using EOD data to find suitable pairs and then attempting to get a similiar or better price the next morning. Sometimes this results in missed trades, sometimes it also helps avoid extreme price changes. An example of a trade that presented itself at close yesterday was "short FLT@11.80, long TEN@1.30". While TEN has remained steady, FLT has rocketed to 13.56! In the opinion of those who have been doing this longer than I, does this now make it an even more appealing trade, or is this 15% movement an indication that they should no longer be used as a pair? (looking at the graphs from yesterday correltation is very high, with reasonable looking % from mean and spread charts - spread trending, % from mean oscillating).

The key here is position sizing

Personally I put 5% of equity long, 5% short...

The above black swan would result in me losing .75% of capital....

Get 5 of them in a row and your down 3.75%...Woopeee Dooo

Can't go bust if you try.

The catch here is you need to run many positions at the same time to offset the low exposure...

Having a bunch of cash in the market at one time isn't a worry when trading pairs, as you completely neutral (As opposed to having a bunch long or short the market).

 

[Pairs Trader]

Yes pair trading has been a bit soft lately, not many trades, PnL comes and goes in waves as with all trading systems, you just gotta have the guts to hold on and stay patient, as Ive constantly said treat your trading like a business, try to be profitable every quarter, not every day.

I strongly encourage all new readers of this journal, especially those who are going to post questions to take the time and invest in your education by reading this entire journal, read 2 or 3 times if it helps, those several hours of reading will be sure to pay dividends.

FLT released better than expected earnings and guidance yesterday, I saw it at over 3 stdev above the market too, however I will repeat this for the 68th time, don't trade stocks affected by news, this includes up to a week after the news release.

To check for new releases please use the ASX website -> announcements, you can also use this link http://www.investorsnetwork.com.au/research_channel/calendar_book/index.php to ensure your not putting on a position within 2 weeks of a earnings release.

 

[Charlie Whiskey]

PT, on the topic of news, how do you manage news that come out after you have entered a trade? It seems to be a rare event in this thread and I'm sure you're doing your best to avoid this situation, but I would like to get some insight on how to formulate a plan of action when it happens. Thanks.

 

[skc]

Since I work full-time, i cannot use the pairtrade software during the day and have been experimenting with using EOD data to find suitable pairs and then attempting to get a similiar or better price the next morning. Sometimes this results in missed trades, sometimes it also helps avoid extreme price changes. An example of a trade that presented itself at close yesterday was "short FLT@11.80, long TEN@1.30". While TEN has remained steady, FLT has rocketed to 13.56! In the opinion of those who have been doing this longer than I, does this now make it an even more appealing trade, or is this 15% movement an indication that they should no longer be used as a pair? (looking at the graphs from yesterday correltation is very high, with reasonable looking % from mean and spread charts - spread trending, % from mean oscillating).

Personally I only trade pairs in the same industry. To me news can be classified into company-specific vs industry news. FLT's news show that the worst in the travel industry appear over. Have a look at other industry related stocks like Webjet, Wotif - they have both risen strongly as well either side of the FLT news. So in case you are shorting FLT you have also gained quite a bit on the long side. This strategy doesn't protect you from company-specific news, but good neutrality for industry news.

On the ASX I find quite a number of industries offering great pairing...
Media
Building materials
Coal miners
Wealth managers
Engineering companies
Healthcare
Retailers
Gold miners
Utilities
Oil and gas
etc

and I found there to be more than enough opportunities without having to ever consider pairs like FLT / TEN. Pairing FLT and TEN is a lot less correlated than the statistics may suggest.

 

[Pairs Trader]

We complied this interesting chart showing similarities between 1929 and now, both charts start at their peaks http://tinyurl.com/m2a9xz Note the current divergence in both charts, if the dow jones was at 14,000 back in 1929, it would have gone down to below 2,000 by 1932.

The dow could reach 10,300 by the end of this bull run or should we say short squeeze, which is a 50% retracement from it's 2007 high, at the very least there will be profit taking at that level and the downtrend may resume in what we think will be the 2nd half of the ''W'' shaped bottom.

The market bounced hard of its march lows by the leak of memo that citigroup would be announcing a profitable quarter for the first time in awhile, shorts immediately starting covering and the market has since sucked in new gullible buyers on the premise of a ''economic recovery'' just the same mentality in 1930. Look for a big bank announcing bad news in tandem with a 2%+ down day on big volume for a trend reversal.

 

[bochman]

looking at the chart, the correlation doesn't seem to be that strong?

 

[auric]

yes still not out of the woods yet correlation is not bad remember that they did not have that creative accounting back in the 30's that we have now in that you can put a value on your bad investments of what you think they are worth not what the market thinks..

 

[Pairs Trader]

technical correlation may not be that strong, however the direction is plus whenever the 2 lines diverge then tend to converge again.

yes we have creative accounting now, but that won't save them, the market figures out and prices in the truth eventually, it ain't stupid.

 

[manuelg]

Thanks everyone for their input. I have been trading shares using the PairTrader software (and my own discretion) for 2 months and have made a small profit. I have also read this journal from the beginning, but was just curious how others deal with the issue of news affecting price. I guess being watchful is the best way of avoiding a quick run against you.

Interestingly FLT has come done sharply from its high yesterday and TEN has increased...anyone trading as a pair would have made a healthy profit...

 

[MRC & Co]

The market bounced hard of its march lows by the leak of memo that citigroup would be announcing a profitable quarter for the first time in awhile, shorts immediately starting covering and the market has since sucked in new gullible buyers on the premise of a ''economic recovery'' just the same mentality in 1930. Look for a big bank announcing bad news in tandem with a 2%+ down day on big volume for a trend reversal.

lol, I think this rally has a bit more to it than a leaked Citi memo and some short covering.

Data all over the world has been steadily improving for many weeks now. I believe France and Germany just ended their recessions today.......

The US jobs market has been steadily improving, the housing market has stabilized, manufacturing has picked up, stimulus is flowing, credit is not as tight, inflation is still of no concern (allowing further scope for stimulation).

Not that all this information is not already priced in as of now, but it's a big difference to gullible buyers.

 

[Pairs Trader]

lol? do you watch the market 16hrs a day?

It was exactly the rumour of citi/banking sector returning to profitability and stabilizing in March that induced the short covering, plus a myriad of indicators support this theory that this run up has more to do with short covering than fresh buying, the nominal increase in the stock market value hasn't matched the outflow from money/bond/paper funds, nowhere near it. Also with unemployment set to rise for the next 2 years at least, plus savings rate going from -9% to +7% where do you think new corporate earnings are going to come from? the whole world is still de-leveraging and since consumption is correlated to profits the risk is on the downside. The market has priced in a recovery and anything less is going to disappoint. I could go on and on all day about this with supporting data, but this is a pair trading journal, not a economic debating journal, if you don't see clouds on the horizon I guess your looking through a different lens than me which is fine, that's what makes a market, buyers and sellers.

''Whenever you find yourself on the side of the majority, it's time to pause and reflect.'' Mark Twain.

 

[MRC & Co]

lol? do you watch the market 16hrs a day?

It was exactly the rumour of citi/banking sector returning to profitability and stabilizing in March that induced the short covering, plus a myriad of indicators support this theory that this run up has more to do with short covering than fresh buying, the nominal increase in the stock market value hasn't matched the outflow from money/bond/paper funds, nowhere near it. Also with unemployment set to rise for the next 2 years at least, plus savings rate going from -9% to +7% where do you think new corporate earnings are going to come from? the whole world is still de-leveraging and since consumption is correlated to profits the risk is on the downside. The market has priced in a recovery and anything less is going to disappoint. I could go on and on all day about this with supporting data, but this is a pair trading journal, not a economic debating journal, if you don't see clouds on the horizon I guess your looking through a different lens than me which is fine, that's what makes a market, buyers and sellers.

''Whenever you find yourself on the side of the majority, it's time to pause and reflect.'' Mark Twain.

Yes, I watch the market 16 hours a day.

I don't dispute the rally was caused by short-covering, but to say it has continued because of 'gullible buyers' is not the truth. If you watch the data 16 hours a day and the markets reaction, you cannot dispute there has been a genuine pick-up from where we were at near the bottom, stimulus enhanced or not, it is there for all to see.

I don't dispute the factors you talk of going forward, as I stated in my last post, I also don't dispute the good news may already be factored in (I am positioning for it myself), but we are talking about gullible buyers who came in because of short-covering, which is far too simplistic considering what we have seen over the past few months data wise.