ASX Stock Pairs Trade Journal

[Charlie Whiskey]

QAN & VBA pair is struggling, not that I am in it. Signal suggests it should work, but it doesn't seem to. May be VBA is just too small.

VBA has been quite volatile lately. By the way this trade lost me $2400 on a $20000 pair (simulated money - thankfully!) two or three weeks ago.

Just wondering how everyone else is doing with pair trading in the past 2 months? I have been making a straight row of losses on my paper trading.

 

[skc]

VBA has been quite volatile lately. By the way this trade lost me $2400 on a $20000 pair (simulated money - thankfully!) two or three weeks ago.

Just wondering how everyone else is doing with pair trading in the past 2 months? I have been making a straight row of losses on my paper trading.

Charlie, not sure why it isn't working for you. Feel free to post your trades and I can may be comment whether it's the stock you paired up or the actual signals.

With a pair like QAN / VBA, you need to know something about the nature of the share. VBA has a higher beta than QAN - it means it is more volatile than QNA. So if I get a signal to short QAN and long VBA, then I will take it only if I believe the overall market is likely to rise. Shorting VBA seems unwise to me in the middle of a sharp rally (which it was a few weeks ago).

It has been the most profitable month pair trading for me, growing my capital by 20% over 50 trades... All stats remain pretty much the same as my last update. The only difference is trade frequency (yes I went a bit gun-ho).

1 pair I am particularly fond of is APN/FXJ. I have opened and closed it 3 times within the 1 signal.

20/10/9 Long FXJ @ $1.74, Short APN @ $2.48
21/10/9 Sell FXJ @ $1.785, Cover APN @ $2.38
Net gain (before commission) = 6.8% (on leg size)

26/10/9 Long FXJ @ $1.745, Short APN @ $2.47
27/10/9 Sell FXJ @ $1.705, Cover APN @ $2.34
Net gain = 3.3%

28/10/9 Long FXJ @ $1.675, Short APN @ $2.40
29/10/09 Sell FXJ @ $1.615, Cover APN @ $2.25
Net gain = 3.1%

The return is diminishing as you can see as the pair is returning to the mean, but I've milked them enough. Sorry if it sounds like hindsight trading - feel free to ignore it.

 

[bochman]

Charlie, not sure why it isn't working for you. Feel free to post your trades and I can may be comment whether it's the stock you paired up or the actual signals.

With a pair like QAN / VBA, you need to know something about the nature of the share. VBA has a higher beta than QAN - it means it is more volatile than QNA. So if I get a signal to short QAN and long VBA, then I will take it only if I believe the overall market is likely to rise. Shorting VBA seems unwise to me in the middle of a sharp rally (which it was a few weeks ago).

It has been the most profitable month pair trading for me, growing my capital by 20% over 50 trades... All stats remain pretty much the same as my last update. The only difference is trade frequency (yes I went a bit gun-ho).

1 pair I am particularly fond of is APN/FXJ. I have opened and closed it 3 times within the 1 signal.

20/10/9 Long FXJ @ $1.74, Short APN @ $2.48
21/10/9 Sell FXJ @ $1.785, Cover APN @ $2.38
Net gain (before commission) = 6.8% (on leg size)

26/10/9 Long FXJ @ $1.745, Short APN @ $2.47
27/10/9 Sell FXJ @ $1.705, Cover APN @ $2.34
Net gain = 3.3%

28/10/9 Long FXJ @ $1.675, Short APN @ $2.40
29/10/09 Sell FXJ @ $1.615, Cover APN @ $2.25
Net gain = 3.1%

The return is diminishing as you can see as the pair is returning to the mean, but I've milked them enough. Sorry if it sounds like hindsight trading - feel free to ignore it.

No, I agree with you. I have paired those twice, made money (I posted 1 of the trade here a few days ago). However, I didn't make as much as I tend to close out a tad too early.

 

[Charlie Whiskey]

SKC, it's good to know it's my set up not the market at fault. That means it's something I can fix.

I'm flat out this weekend doing something else, I'll post my trade procedure and past trade history some time next week. Hope you can pick up some mistakes I didn't know about. Thanks mate.

 

[tigger36]

SKC, it's good to know it's my set up not the market at fault. That means it's something I can fix.

I'm flat out this weekend doing something else, I'll post my trade procedure and past trade history some time next week. Hope you can pick up some mistakes I didn't know about. Thanks mate.

Hi, fyi, my first month of pair trading (on FTSE350) has been somewhat mediocre. Only 6 trades, 3 wins/3 losses, in profit slightly overall. I have been doing alot of trawling of pair trading journals and web sites, both here and on the Elite Trader forums, and am coming to a few conclusions on pair trading from the many posts I have read:
- Experience in pair trading makes a big difference, maybe obvious!, but it can make a real diffence if you can avoid the big losers.
- Some pair traders have made huge profits over the last year, > 100% annualized, I even read one post suggesting >1000% (not sure if I believed that!)
- However...I read some posts from some newbie pair traders that lost big amounts. The typical scenarios I read were in the first month they closed off a number of good winners, but had left open some bigger losers that more than offset the winners. Some of these posters I didn't see a response from again...?
- I am getting a feeling that the rewards from pair trading can be over exagerated, and more reasonable returns should prepared for, as the method is high win rate, but prone to "big losers".
- Some traders can be lucky and do well, others not so due to big losers. A good article I read that suggests this is here: http://www.harcourt.ch/manual/swisshedge/2003/q3/investors_view.pdf

I myself think it is a good method for myself, but I am setting my goals at a realistic smaller return, if I achieve more than this then that serves as a buffer for that inevitable big bad trade.

Apologies for the ramble... just a few thoughts from my readings...

Cheers

 

[skc]

Hi, fyi, my first month of pair trading (on FTSE350) has been somewhat mediocre. Only 6 trades, 3 wins/3 losses, in profit slightly overall. I have been doing alot of trawling of pair trading journals and web sites, both here and on the Elite Trader forums, and am coming to a few conclusions on pair trading from the many posts I have read:
- Experience in pair trading makes a big difference, maybe obvious!, but it can make a real diffence if you can avoid the big losers.
- Some pair traders have made huge profits over the last year, > 100% annualized, I even read one post suggesting >1000% (not sure if I believed that!)
- However...I read some posts from some newbie pair traders that lost big amounts. The typical scenarios I read were in the first month they closed off a number of good winners, but had left open some bigger losers that more than offset the winners. Some of these posters I didn't see a response from again...?
- I am getting a feeling that the rewards from pair trading can be over exagerated, and more reasonable returns should prepared for, as the method is high win rate, but prone to "big losers".
- Some traders can be lucky and do well, others not so due to big losers. A good article I read that suggests this is here: http://www.harcourt.ch/manual/swisshedge/2003/q3/investors_view.pdf

I myself think it is a good method for myself, but I am setting my goals at a realistic smaller return, if I achieve more than this then that serves as a buffer for that inevitable big bad trade.

Apologies for the ramble... just a few thoughts from my readings...

Cheers

Tigger,

My strategy has always been to avoid big losers. To do that it means don't trade around pending announcements, keeping position sizes in check, get to know the companies well / better, and implementing a time based stop. FWIW my biggest lost over 150 trades was 2.7% of account, worst losing stretch was 4 losses in 5 trades that resulted in a 4.8% drawdown.

1000% return is possible if you use leveraged instruments like CFD. A 10-15x leverage means you only need to return 60-100% on the actual trades. This however carries a lot more risk as some bad luck early on can easily blow up the account. Risk-controlled trading is what I prefer and the way to long term profitability imo.

To start take smaller positions, but more of them. Say go 8% leg size and run 5 or 8 pairs at any one time across multiple sectors. That way you gain some diversification straight way. You also get to learn the behaviour of individual stocks... what moves fast, what is volatile, how good is the liquidity etc... the more intimate you know a stock the better your entry and exit will be. Pair trading is a thin margin game so a few ticks each way can add up. Aim to get 50 trades under the belt with a focus on risk management and accepting losses. Then step up leg size as comfort level increases.

 

[tigger36]

Tigger,

My strategy has always been to avoid big losers. To do that it means don't trade around pending announcements, keeping position sizes in check, get to know the companies well / better, and implementing a time based stop. FWIW my biggest lost over 150 trades was 2.7% of account, worst losing stretch was 4 losses in 5 trades that resulted in a 4.8% drawdown.

1000% return is possible if you use leveraged instruments like CFD. A 10-15x leverage means you only need to return 60-100% on the actual trades. This however carries a lot more risk as some bad luck early on can easily blow up the account. Risk-controlled trading is what I prefer and the way to long term profitability imo.

To start take smaller positions, but more of them. Say go 8% leg size and run 5 or 8 pairs at any one time across multiple sectors. That way you gain some diversification straight way. You also get to learn the behaviour of individual stocks... what moves fast, what is volatile, how good is the liquidity etc... the more intimate you know a stock the better your entry and exit will be. Pair trading is a thin margin game so a few ticks each way can add up. Aim to get 50 trades under the belt with a focus on risk management and accepting losses. Then step up leg size as comfort level increases.

Yes, I think we agree. I'm just reporting what I've observed from my reading. You say you avoid big losers, I think what you're saying is my first point above about using experience to try and avoid them. You cannot guarantee to avoid big losers. You have done very well for 150 trades I would say, shows you have built up good experience and knowledge.
My backtesting has shown some big losers for which there were no news or anything obvious, just obviously some fundamental change...i'm just trying to aleave the worries of the few people who have posted on this forum that are not doing that well... like Charlie Whiskey, so they get the right expectation.

If you make 1000% using leveraged products, then when that big loser does eventually creep up, that person would making a wopping big loss too!

 

[tigger36]

Tigger,
To start take smaller positions, but more of them. Say go 8% leg size and run 5 or 8 pairs at any one time across multiple sectors. That way you gain some diversification straight way. You also get to learn the behaviour of individual stocks... what moves fast, what is volatile, how good is the liquidity etc... the more intimate you know a stock the better your entry and exit will be. Pair trading is a thin margin game so a few ticks each way can add up. Aim to get 50 trades under the belt with a focus on risk management and accepting losses. Then step up leg size as comfort level increases.

skc,
I think you may have hit one nail on the head with this.. I think my entry criteria has been too selective, I have only managed 6 trades in one month, whereas you say you've achieved 50, you obviously have less selective entry than I do. As you say this would give me more diversification and spread across sectors, I just need to adjust my trade size down and manage effectively. This is my current pair entry criteria for FTSE350 stocks:
1. pair 100 day correlation > 0.80. (pair is correlated)
2. pair 50 day correlation > 0.65. (pair is still correlated over the shorter term)
3. 100 day correlation is increasing
4. stocks are in the same Sector and have MCap > 200m and average volume > 150k/day. (stocks are liquid)
5. Ratio chart shows nice range, no big trends.
6. No news on either Stock, earnings etc..
7. Pair has shown good cointegration in backtesting. > 75% wins, profit factor > 1.75
8. Pair ratio is currently > 2.0 std deviations from mean
9. Stock price charts show no obvious "range breakout" occuring.
10. Stock prices are both the same side of their 20day SMA. (ie.not in different trends)

Currently this produces about 10 signals per month.

If i'm thinking of relaxing this, what would you recommend changing?
I am thinking maybe remove criteria's 2 and 10 to start with, and maybe relaxing 7 a bit?

Thanks

 

[tigger36]

Tigger,
To start take smaller positions, but more of them. Say go 8% leg size and run 5 or 8 pairs at any one time across multiple sectors. That way you gain some diversification straight way. You also get to learn the behaviour of individual stocks... what moves fast, what is volatile, how good is the liquidity etc... the more intimate you know a stock the better your entry and exit will be. Pair trading is a thin margin game so a few ticks each way can add up. Aim to get 50 trades under the belt with a focus on risk management and accepting losses. Then step up leg size as comfort level increases.

Also, do you trade Sector pairs, or sub-sector Industry pairs? Changing to the later, does reduce the number of pairs, but makes for better quality pairs. This is certainly the case for the FTSE350 Sectors, where Sectors like "Retail" or "Mining" can be very wide ranging...
Cheers

 

[retroaugogo]

Hope nobody was short Axa today.Up 30% on news in a day.

Underlines the shortcomings of the system and the problems insider trading causes pushing it into overbought territory in the first instance.

 

[skc]

Hope nobody was short Axa today.Up 30% on news in a day.

Underlines the shortcomings of the system and the problems insider trading causes pushing it into overbought territory in the first instance.

As I said... know your stock as intimately as possible is the best measure against situation like AXA.

Some catuion required as the sector is under takeover rumours at the moment. Banks awash with capital are said to be eyeing the likes of AMP, while AXA is always prone to prey by it's French parents. But if someone was to move on one of them, the whole sector will follow suit no doubt.

 

[tigger36]

Hope nobody was short Axa today.Up 30% on news in a day.

Underlines the shortcomings of the system and the problems insider trading causes pushing it into overbought territory in the first instance.

Exactly my point above, you never know when this sort of event could occur causing a big drawdown in your pair trading system... although I also fully agree with "skc", in that knowing your stocks will definitely help you avoid them...
If you have a large selection of pairs, like i've heard of some people with 500+ pairs on their watchlist, then I would say that's always going to be more dangerous as you'll find it hard to keep an eye on the news of that many pairs...just spend alot of time researching upon an entry signal is the answer I guess, don't just jump in...

 

[skc]

Exactly my point above, you never know when this sort of event could occur causing a big drawdown in your pair trading system... although I also fully agree with "skc", in that knowing your stocks will definitely help you avoid them...
If you have a large selection of pairs, like i've heard of some people with 500+ pairs on their watchlist, then I would say that's always going to be more dangerous as you'll find it hard to keep an eye on the news of that many pairs...just spend alot of time researching upon an entry signal is the answer I guess, don't just jump in...

Position size is also the key.

Say you had 20% account size on the short leg, and it jumps 30%. That's 6% against your capital. Bad, but not devastating.

 

[tigger36]

Position size is also the key.

Say you had 20% account size on the short leg, and it jumps 30%. That's 6% against your capital. Bad, but not devastating.

Yes.. unless it's leveraged like those 1000%+ winners we were talking about previously... like 20x CFDs they would then be 120% down, ie.blown out and in debt!!

 

[Charlie Whiskey]

I didn't short AXA, but I did short AMP the day before it made the announcement, and it's going up quite strongly since. :-(

Luckily again that was only paper trading. I think I'll hold on a few more days to see how it goes.

 

[skc]

I didn't short AXA, but I did short AMP the day before it made the announcement, and it's going up quite strongly since. :-(

Luckily again that was only paper trading. I think I'll hold on a few more days to see how it goes.

If I held AXA or AMP for real I would have exited straight away. The idea is trade in the absence of news and looking for mean reversion. To hold onto AMP is to take a view on the individual stock based on the recent development. AMP is now squarely in the spotlight and rumours have it that it will become a target itself.

The risk adverse approach would be to cut your loss and move on. Sure they may raise the AXA offer and fall 10% tomorrow. But I would first remove myself in the way of possible harm first.

You may decide to leave the long leg to run, but that would be a positional trade rather than pairs trade.

 

[Charlie Whiskey]

If I held AXA or AMP for real I would have exited straight away. The idea is trade in the absence of news and looking for mean reversion. To hold onto AMP is to take a view on the individual stock based on the recent development. AMP is now squarely in the spotlight and rumours have it that it will become a target itself.

Good reminder. Thanks.

 

[Freddy]

I am having problems with PT. For instance, I just looked back on APN/FXJ pair and found that there is a great big hole from 20 May to 5 Nov 2009 in the analysis list. I only rebuilt the database a week ago.

Another problem I find is that an Enter Trade occurs, I do my research, set the trade and next day PT indicates 'Watching'. Has anyone else found this?

Also the software has quite a few bugs such as 'Refresh Prices', when the are you sure message appears you can only get it to action by movng the cursor outside the form. This is the case when entering new pairs.

 

[skc]

I am having problems with PT. For instance, I just looked back on APN/FXJ pair and found that there is a great big hole from 20 May to 5 Nov 2009 in the analysis list. I only rebuilt the database a week ago.

Another problem I find is that an Enter Trade occurs, I do my research, set the trade and next day PT indicates 'Watching'. Has anyone else found this?

Also the software has quite a few bugs such as 'Refresh Prices', when the are you sure message appears you can only get it to action by movng the cursor outside the form. This is the case when entering new pairs.

Yes all true. It's buggy as...

Email the programmer and abuse them, gently

 

[skc]

skc,
I think you may have hit one nail on the head with this.. I think my entry criteria has been too selective, I have only managed 6 trades in one month, whereas you say you've achieved 50, you obviously have less selective entry than I do. As you say this would give me more diversification and spread across sectors, I just need to adjust my trade size down and manage effectively. This is my current pair entry criteria for FTSE350 stocks:
1. pair 100 day correlation > 0.80. (pair is correlated)
2. pair 50 day correlation > 0.65. (pair is still correlated over the shorter term)
3. 100 day correlation is increasing
4. stocks are in the same Sector and have MCap > 200m and average volume > 150k/day. (stocks are liquid)
5. Ratio chart shows nice range, no big trends.
6. No news on either Stock, earnings etc..
7. Pair has shown good cointegration in backtesting. > 75% wins, profit factor > 1.75
8. Pair ratio is currently > 2.0 std deviations from mean
9. Stock price charts show no obvious "range breakout" occuring.
10. Stock prices are both the same side of their 20day SMA. (ie.not in different trends)

Currently this produces about 10 signals per month.

If i'm thinking of relaxing this, what would you recommend changing?
I am thinking maybe remove criteria's 2 and 10 to start with, and maybe relaxing 7 a bit?

Thanks

Sorry I didn't see these until today. How many pairs do you have to get only 10 signals a month? Most of my pairs will produce anything like 10-15 signals a year, so with ~300 pairs in the data base I get 10+ signals per day.

My criteria are similar, except I am not that strict with correlations. To me the correlation has to go apart in order to have any divergence, so I am not that worried if correlation was 50-60% 2 months ago. Increasing correlation also means nothing to me. It's really not a share price chart and no reason to believe trends are likely to continue. The 20day SMA also feels unimportant... if 20day SMA is that useful as an indicator then you might as well do directional trades with that. Lastly I scrutinise the historical profit, and take out anything that's out of whack due to announcements, capital raising etc. Basically anything that's over 10% PnL are probably trades that shouldn't have been taken anyway.

The other trick is to close out the pairs and take profits quickly. Before I enter a pair I work out what's the potential profit if the pair goes back towards the mean straight away. And I will take profit if I can get 70-80% of that full potential amount. Reason being that the MA will move everyday and they generally move in the opposite direction of the ratio. So why wait for the exit signal for another 2 days when that signal will produce a profit similar to what you have today?

Also, do you trade Sector pairs, or sub-sector Industry pairs? Changing to the later, does reduce the number of pairs, but makes for better quality pairs. This is certainly the case for the FTSE350 Sectors, where Sectors like "Retail" or "Mining" can be very wide ranging...
Cheers

I know nothing about FTSE350 sectors so can't comment. But when I say I try to know my stocks intimately I mean really intimately. Two stocks might be both retailers but one has more sales in the US and is hurt by the higher $AUD. So unless I believe $AUD is due for a fall I am not going to long that stock straight away... wait a day or two before entering can often improve your entry, even when the std dev is no longer at 2.0.

And with mining companies they should mine the same stuff at a minimum...