ASX Stock Pairs Trade Journal

[skc]

I don't know about 'true pairs trading', I would say you are referring too a long-short equity hedge fund strategy.

People take pairs trades for all kinds of reasons, many are very discretionary and rely on much more than correlation and mean reversion only. For example the 'bank stress tests' in the states, saw many going long SPI, short S&P, the assumption: good results and both banking sectors would rally, bad results would be seen as a huge negative to the US banking sector but would not indicate anything in relation to the Australian banking sector.

But I like this 'pairs scalping' style.

Yes there are many styles of pairs trading indeed. Some hold pairs intraday, some hold them for multiple years on macro trends. I actually first get exposed to this type of hedged trading from the BBC series "Million Dollar Traders" and it was a hedge strategy around news event during the GFC.

This is the area I would like to get into a bit more... just multi-leg long short strategies around equities.

My first trade was actually long RIO short BHP which was a combination of fundamentals and technicals. On hindsight obviously I didn't hold it long enough! And that's the main problem with my pairs scalping - I do leave a fair bit on the table at times... but overall I can't fault my equity curve.

Including commission x 4?

Clear 1.5-2% after commission x4 (or ~0.4%). Here's a winners distribution graph. Note 80% of trades return <3% (of leg size), and they collectively account for 62% of $$ won. It's small wins + high win rate that makes the equation profitable.

 

[FXanyone]

Hi

I have posted here a couple of times.

I recently started pairs trading and its been going fairly well. That said I have one major concern.

I am experienced from other markets ( I worked for banks, mainly in derivatives). As such I was always have been extremely disciplined with stops. With pairs I have struggled to find something that works.

I am prepared to take on slightly less correlated pairs than seem to be the norm from what I read in threads and literature. That however isnt the issue.

I made 18 trades in January and increased my portfolios value around 10%. However 2 trades killed me - Long WAN Short SEV and Long HSP short RHC (was out of that prior to the big spike yesterday!!)

A $ amount ? A percentange? One trade I have on right now was hugely against me this morning but came back well during the afternoon- should they be End of Day stops?

Would greaty appreciate any thoughts?

Cheers

 

[skc]

Hi

I have posted here a couple of times.

I recently started pairs trading and its been going fairly well. That said I have one major concern.

I am experienced from other markets ( I worked for banks, mainly in derivatives). As such I was always have been extremely disciplined with stops. With pairs I have struggled to find something that works.

I am prepared to take on slightly less correlated pairs than seem to be the norm from what I read in threads and literature. That however isnt the issue.

I made 18 trades in January and increased my portfolios value around 10%. However 2 trades killed me - Long WAN Short SEV and Long HSP short RHC (was out of that prior to the big spike yesterday!!)

A $ amount ? A percentange? One trade I have on right now was hugely against me this morning but came back well during the afternoon- should they be End of Day stops?

Would greaty appreciate any thoughts?

Cheers

I apply 3 saftguards

1. Time based stop. 12-15 days seem to work for me. Get's triggered every now and then.

2. Event based stop. If news come out and move the stock substantially against you.... I'd just take the loss and move on. Again, happens every now and then. But knowing your stock well and avoid trading around profit announcement times will help.

3. Absolute hard stop as percent of account. This will depend on your own personal risk appetite and your leg size relative to your account size. I use 5%. As my leg size is 20% of my account size, the pairs need to go out of whack by 25% for this hard stop to be hit. Fortunately this has yet to happen for me.

 

[SilverRanger]

I apply 3 saftguards

1. Time based stop. 12-15 days seem to work for me. Get's triggered every now and then.

2. Event based stop. If news come out and move the stock substantially against you.... I'd just take the loss and move on. Again, happens every now and then. But knowing your stock well and avoid trading around profit announcement times will help.

3. Absolute hard stop as percent of account. This will depend on your own personal risk appetite and your leg size relative to your account size. I use 5%. As my leg size is 20% of my account size, the pairs need to go out of whack by 25% for this hard stop to be hit. Fortunately this has yet to happen for me.

Of course there is also the more aggressive option of adding additional layer(s) on trades going against you, but I only tend to do this when I am confident that the price movement is not news induced

 

[skc]

Of course there is also the more aggressive option of adding additional layer(s) on trades going against you, but I only tend to do this when I am confident that the price movement is not news induced

Layering doesn't substitute the stops. It is done before any of the stop condition is hit.

You can't blow the account by following all three stop rules (which I should clarify that all three are applied at the same time). But you can blow it by substituting them with layering.

 

[tigger36]

Hi

I have posted here a couple of times.

I recently started pairs trading and its been going fairly well. That said I have one major concern.

I am experienced from other markets ( I worked for banks, mainly in derivatives). As such I was always have been extremely disciplined with stops. With pairs I have struggled to find something that works.

I am prepared to take on slightly less correlated pairs than seem to be the norm from what I read in threads and literature. That however isnt the issue.

I made 18 trades in January and increased my portfolios value around 10%. However 2 trades killed me - Long WAN Short SEV and Long HSP short RHC (was out of that prior to the big spike yesterday!!)

A $ amount ? A percentange? One trade I have on right now was hugely against me this morning but came back well during the afternoon- should they be End of Day stops?

Would greaty appreciate any thoughts?

Cheers

This is the issue that scared me off pairs trading back in Nov/Dec, I had a string of bad trades that killed me off... not sure there's an easy answer...
I've now moved onto more traditional medium term trading, but still use my pair trading tools to find interesting stocks, similar to SKCs other trading journal thread, and I am alot more comfortable being able to apply normal stops and trade management.

My only thought is knowing your stocks very well and their news associated with them, so you are sure that a current mean diversion is not a fundamental one.

 

[SilverRanger]

Layering doesn't substitute the stops. It is done before any of the stop condition is hit.

You can't blow the account by following all three stop rules (which I should clarify that all three are applied at the same time). But you can blow it by substituting them with layering.

Yes, you are right that layering shouldn't substitute your stop rules, it should work with them

 

[Wysiwyg]

What I am trading is some short term random deviation of the pair, hoping that they will converge in the short term (usually and hopefully less than a week)

So given everything is short term, then a short term graph is probably more helpful, but the long term ones can also help to confirm the correlation part

Some good entry points (short WDC, long GPT) are 11/12/2009, 13/01/2010, 22/01/2010

Thanks for that overview and good luck with your pairs trading.

 

[SilverRanger]

Yes, you are right that layering shouldn't substitute your stop rules, it should work with them

The point I was getting at is that when trades start going against you, layering is an alternative to just taking the stop loss.
Perhaps tigger36 you can take a look at your past trades to see whether this would have helped to recouped some of your losses (or made it worse...)

 

[skc]

The point I was getting at is that when trades start going against you, layering is an alternative to just taking the stop loss.
Perhaps tigger36 you can take a look at your past trades to see whether this would have helped to recouped some of your losses (or made it worse...)

I am unsure whether you are not getting it, or just your wording is confusing...

Layering is NOT an alternative to take stop loss.

You can layer all you want before your stop is hit. But you don't layer instead of exiting the trade when your stop is hit. When your stop is hit, you get out, regardless of how many layers you have on, or how many more layers you could put on.

Just take a loss and move on. It's not that hard.

 

[SilverRanger]

I am unsure whether you are not getting it, or just your wording is confusing...

Layering is NOT an alternative to take stop loss.

You can layer all you want before your stop is hit. But you don't layer instead of exiting the trade when your stop is hit. When your stop is hit, you get out, regardless of how many layers you have on, or how many more layers you could put on.

Just take a loss and move on. It's not that hard.

Yes, it was my wording, I didn't mean stop loss, but just losses in general from a losing trade.

It must be the lack of sleep I had recently

Closed out MYR/DJS trade today for some modest profit

 

[skc]

Yes, it was my wording, I didn't mean stop loss, but just losses in general from a losing trade.

It must be the lack of sleep I had recently

Closed out MYR/DJS trade today for some modest profit

Trading US/UK markets can do that to you!

 

[MRC & Co]

Layering/averaging down, IMO, should only be used if you are working an area/managing the position.

But to do this, you have to know what you are trying to do, i.e experienced at your method and know when to cut it without blowing away too much of your account.

 

[skc]

Layering/averaging down, IMO, should only be used if you are working an area/managing the position.

But to do this, you have to know what you are trying to do, i.e experienced at your method and know when to cut it without blowing away too much of your account.

Many times I feel like layering but decided against it. Because I think the maths of pairs trading quickly point to just cut the losses.

There are no big 20R trades in pairs trading (except you get really lucky), so really when you average down you are just hoping for breakeven or slightly better. Compare that to a potential blowup... really doesn't compute in my head most of the time.

And I found carrying a large losing trade really affects my trading. I end up being gun shy, take smaller positions on proven, reliable pairs etc. When in reality I should cover a lost in the next two trades.

 

[shayneb]

I agree SKC. I have not layered within any pair and don’t think I will in the short term.

My stop is partly time based and if I have a pair open after 10 days than I exit regardless of a profit or loss.

 

[FXanyone]

Thanks for the feedback all

 

[skc]

Boral was going a bit crazy yesterday and got a signal to enter short BLD and long CSR.

I pondered for a while and decided against it, given that CSR is undergoing some demerger and I didn't know what are the key risk factors.

That very afternoon CSR went into a halt and the court is blocking it's demerger proposal. It looks to open ~10% down.

Definitely dodged a bullet there.

 

[jake]

Panic Selling Hits Tatts Group Ltd Shares

Today Tatts Group Ltd shares hit a new record low of $2.21 a share on panic selling.

Shareholders are expecting a dividend of 10 cents to be announced mid February if all goes well.





position held in the stock.

 

[skc]

Re: Panic Selling Hits Tatts Group Ltd Shares

Today Tatts Group Ltd shares hit a new record low of $2.21 a share on panic selling.

Shareholders are expecting a dividend of 10 cents to be announced mid February if all goes well.



position held in the stock.

Are you on the right thread? What did you pair TTS with?

There are quite a lot of uncertainties floating around the gaming stocks with regards to the Vic licenses. I don't really know the date of any such decision, the likely outcome or the implication of such outcomes.... so all related stocks are in my ignore list at the moment.

 

[SilverRanger]

Anyone picked up WPL/OSH trade today? OSH was so out-of-whack at one point with buyer/seller of 1:10.
I didn't quite get the timing right for this one so I'm only sitting with slight profit atm.