ASX Stock Pairs Trade Journal

[Pairs Trader]

Just closed 3rd trade of the journal for nice profits

Sold DJS @ 2.69
Covered HVN @ 2.49

So far 4 trades, 3 closed with profit, 4th open trade showing profits

 

[skc]

Just closed 3rd trade of the journal for nice profits

Sold DJS @ 2.69
Covered HVN @ 2.49

So far 4 trades, 3 closed with profit, 4th open trade showing profits

Nice one PT. When I saw this trade I thought you would profit from HVN falling rather than DJ going up so strongly.

Key lesson: Never under-estimate the power of Miranda Kerr.

 

[Pairs Trader]

closed 4th trade for another profit

Sold LGL @ 3.05
Covered SGX @ 5.14

all I hear is doom and gloom all day, yet this has to be one of best trading environments in years, not for the long-only punters though........

 

[prawn_86]

Well done PT,

Any chance of giving the total % return when you close your trades? As i know you average down sometimes...

 

[Pairs Trader]

So far average trade has been a 4.74% profit, that figure is on the total of both sides invested, its not just the absolute return that matters either, its the fact that im market neutral that gives me lower volatility, lower correlation, lower exposure relative to the market as well.

 

[skc]

Hey PT, I am thinking about long TAH and short CWN, mostly on fundamentals (TAH being more diverse, CWN being casinos only) and the fact that young Packer has been down on his luck. And as you know, one of the best strategy in a casino is to bet against the person who looks unlucky...

Any comments?

 

[Pairs Trader]

Yes if you have a good feeling on the fundamentals of these 2 stocks now may not be a bad time to build a position. The ratio chart is approaching 6 month lows, which means over the last several months CWN has been stronger than TAH, and the pair is currently 1.80 standard deviations below its mean, the pair backtests well, the only thing I don't like about this pair is its low & decreasing correlation at 38%, although this is not strictly important if your playing fundamentals, I would look to add to the position below a ratio of 1.00 (TAH/CWN) and look to exit at a ratio of 1.35 which has been a recent resistance zone, that is when TAH share price is 1.35 times that of CWN share price.

 

[sinner]

This is a wonderful thread. Please keep it up!

 

[skc]

Yes if you have a good feeling on the fundamentals of these 2 stocks now may not be a bad time to build a position. The ratio chart is approaching 6 month lows, which means over the last several months CWN has been stronger than TAH, and the pair is currently 1.80 standard deviations below its mean, the pair backtests well, the only thing I don't like about this pair is its low & decreasing correlation at 38%, although this is not strictly important if your playing fundamentals, I would look to add to the position below a ratio of 1.00 (TAH/CWN) and look to exit at a ratio of 1.35 which has been a recent resistance zone, that is when TAH share price is 1.35 times that of CWN share price.

Wonderful. I think all the good news is flushed out in CWN, and chances are young James is up to no good with so much money - hence the fade Packer move. Thanks PT.

 

[Pairs Trader]

I think you may be right on the fundamentals with this pair trade skc, I checked them out and found;

CWN has fy09 p/e of 15.7, fy10 p/e of 10.50
consensus fy09 eps of 37.9, fy10 of 56.8

whereas TAH has fy09 p/e of 7.3, fy10 p/e of 8.0
consensus fy09 eps of 88.0, fy10 of 80.20

so basically analyst expectations are that CWN earnings will grow 49% over the next year whilst TAH earnings will shrink 10%, and valuations have been priced accordingly, not a bad bet to fade these expectations since if they were re-rated the stocks would be ferociously repriced, hard to believe CWN can achieve that growth rate in the current environment, plus a huge difference in applied growth rates between the two stocks, the risk is in the downside re-rating of CWN eps, I don't see it being re-rated to higher than 49%.

Interesting play to watch out.

 

[nizar]

http://www.bennfundsmanagement.com....Equity Fund Monthly Summary February 2009.pdf

These guys manage this AU$52mil fund through pairs trading.
Up 11.95% last year and 14%+ YTD for 2009.
Started in 2002 with average 22%pa.
Impressive.

 

[Pairs Trader]

http://www.bennfundsmanagement.com....Equity Fund Monthly Summary February 2009.pdf

These guys manage this AU$52mil fund through pairs trading.
Up 11.95% last year and 14%+ YTD for 2009.
Started in 2002 with average 22%pa.
Impressive.

Yes the most successful hedge funds especially in the last year have been using pair trading, these guys have some good numbers. I recently did a post on our news page showing Jim Simons, owner of the worlds largest hedge fund testifying in front of congress that he used pair trading to achieve his long term return of 2,478% over the last 11 years. Pair Trading News

 

[Pairs Trader]

Trade opened today

Long MAP @ 1.61
Short QAN @ 1.79

 

[Pairs Trader]

New trade

Long NCM @ 32.28
Short SGX @ 5.63

 

[prawn_86]

Hey PT,

Out of the pair how do you decide which stock to go long and which to short?

 

[nomore4s]

Hey PT,

Out of the pair how do you decide which stock to go long and which to short?

Surely that would be determined by the correlation between the pair?

 

[prawn_86]

Surely that would be determined by the correlation between the pair?

As i understand it (and i could be way off) correlation is just a number. The correlation between abc and xyz is the same as between xyz and abc. So how does one determine which to short and which to go long? Or doesnt it really matter? Or is it which directions they have diverged from the mean correlation?

 

[Pairs Trader]

Basically you buy the stock that has gone down, and short the one that has gone up, however there's no guessing involved, the program will tell you. If you look on the above chart attachment you will see in today's date row, NCM is highlighted green which means go long, SGX is highlighted red which means go short, then a blue highlight means exit the position, I have audio alerts set to notify me when a new signal has arrived on any of my 278 stock pairs so Im not glued to the screen all day. Please find below a screenshot of the main console, here you can see all my pairs loaded and Ive ranked them by trade signals, you can see the coloured ones have enter trade signals, blue highlights are exit signals, yellow are in trades, data is automatically loaded into the system every 30 seconds and is free.

 

[nomore4s]

As i understand it (and i could be way off) correlation is just a number. The correlation between abc and xyz is the same as between xyz and abc. So how does one determine which to short and which to go long? Or doesnt it really matter? Or is it which directions they have diverged from the mean correlation?

lol, The way I understand pairs trading is you enter trades when the pair has diverged from the mean and you trade them back to the mean. So the long and short is determined by the divergence.

Eg - re NCM & SGX - going short NCM and long SGX would mean they are diverting even more from the mean.

Maybe Pairs will clarify it for us Edit: He already did, lol

 

[prawn_86]

So why aren't you taking the other trades its showing that you should enter PT?