ASX Stock Pairs Trade Journal

[SilverRanger]

I spent a lot of time in the last couple of weeks reviewing my trading, and eventually came to the conclusion that my recent drawdown was due mostly to my own actions.

The 10 worst trades in the last month together knocked about 10% from my account. About half of these trades should not have been taken - they had meaningful news released in the not so distant past and I violated my own rules by initiating a position. My trading has been pretty good up until that point and probably a bit of complacency had settle in.

There were 2 or 3 other trades which unexpected news announcements caused a lot of pain. But looking back since the start, there were unexpected news which worked for me as well, so they do even out in the long run.

Last week the account reached a maximum drawdown of 5.17% (which really isn't much) and now back to a drawdown of 3.3%. Nonetheless, it's rather annonying because I was actually on track for 100% return for the year. Now I am tracking far far behind the 100% trajectory (red dotted line on chart).

View attachment 39849

On the bright side, if I can remain parallel to that red line it would still be a good year.

Incidentally my capital growth chart is similar to yours, currently sitting at 89% for the year to Nov. I too took a big hit in Oct and only traded 1 pair in Nov, mainly due to my stricter trigger.
However, that did got me desperate to look into pair trading the Japanese stock market (I didn't look at HK since the costs are too prohibitive IMO). The plan is to buy from IB and short via IG to reduce cost, is anyone else looking into pair trading Japanese shares? I would love to hear some successful stories before committing to it

 

[skc]

Incidentally my capital growth chart is similar to yours, currently sitting at 89% for the year to Nov. I too took a big hit in Oct and only traded 1 pair in Nov, mainly due to my stricter trigger.
However, that did got me desperate to look into pair trading the Japanese stock market (I didn't look at HK since the costs are too prohibitive IMO). The plan is to buy from IB and short via IG to reduce cost, is anyone else looking into pair trading Japanese shares? I would love to hear some successful stories before committing to it

Why is HK cost too high? With IB where you can long and short HK stocks, the commission is only 0.088% (min HKD 18, or <A$3). IB's platform can do some pretty smart things with pairs trading as well.

I was tempted at one stage to look into HK market because of the above, but that would really stretch my time too far. As I've said many times I like to know my stocks really well. Where in HK (and Japan market for that matter) do you get information like news, rumours, takeover watch, capital raising watch, dividend timetable, AGMs, option expiry etc etc... you get my drift.

It's a fully time job to watch another market imo.

 

[SilverRanger]

Why is HK cost too high? With IB where you can long and short HK stocks, the commission is only 0.088% (min HKD 18, or <A$3). IB's platform can do some pretty smart things with pairs trading as well.

I was tempted at one stage to look into HK market because of the above, but that would really stretch my time too far. As I've said many times I like to know my stocks really well. Where in HK (and Japan market for that matter) do you get information like news, rumours, takeover watch, capital raising watch, dividend timetable, AGMs, option expiry etc etc... you get my drift.

It's a fully time job to watch another market imo.

The 0.088% is the amount that IB charges, on top of that there are stamp duty + a bunch of other exchange related fees, that in total is about 0.2% (or a bit more) per trade

Time-wise I don't think trading the HK or Japan market is too stretching, as you can get most of the work done during Aussie trading hour (and certainly not for someone like me out of pairs to trade in ASX)

While there is the risk that we are behind on the news part, the aim is to minimise the risk by trading big-enough companies like properties in HK or motors & electronics companies in Japan, where there are (hopefully) reasonable coverage even on Yahoo or Google finance.

That's just a thought anyway, I will do some serious researching and back-testing in the next couple of days

 

[skc]

The 0.088% is the amount that IB charges, on top of that there are stamp duty + a bunch of other exchange related fees, that in total is about 0.2% (or a bit more) per trade

Time-wise I don't think trading the HK or Japan market is too stretching, as you can get most of the work done during Aussie trading hour (and certainly not for someone like me out of pairs to trade in ASX)

While there is the risk that we are behind on the news part, the aim is to minimise the risk by trading big-enough companies like properties in HK or motors & electronics companies in Japan, where there are (hopefully) reasonable coverage even on Yahoo or Google finance.

That's just a thought anyway, I will do some serious researching and back-testing in the next couple of days

Good to know about the stamp duties... thanks. Many unknowns on overseas markets - I don't even know if Jap company announcements are in English - so much research needed... Then again, nothing venture and nothing gained, so good luck and keep us posted.

If and when you master the Jap market may be we can form an alliance trading team

 

[JohnGP]

Hi all, excuse me for jumping in on this thread but I am new to pairs trading and I have been following this thread with interest. I am based in the UK and intend to pairs trade via a couple of spread betting companies, MF Global Spreads and IG Index.

I have purchased Pair Trade Finder and loaded it up with FTSE 350 stocks that have an average volume in excess of 600k/day. I have paired stocks within specific industry groups.

I have received some good and helpful advice regarding the program set-up from Pairs Trader for which I am very grateful but I am now looking at the actual trading process.

Back-testing the pairs demonstrates good returns overall but I am finding recent trades are running at significant loss even though they back tested well. I notice also that a number of you have suffered from losses in very recent trades. I have found that in a lot of cases, the spread is showing no sign of reverting back to the mean as it has done in the past and there seems to be a lot of trending of the ratio charts as well.

Is there a fundamental change in the market dynamics at the moment or am I just not finding good trades and not being clever enough with my filtering process? I am using the filtering ideas given by Pairs Trader in various parts of this thread.

Any help or guidance would be greatly appreciated; this is my first go at pairs trading so I am a complete novice.

 

[tigger36]

Hi all, excuse me for jumping in on this thread but I am new to pairs trading and I have been following this thread with interest. I am based in the UK and intend to pairs trade via a couple of spread betting companies, MF Global Spreads and IG Index.

I have purchased Pair Trade Finder and loaded it up with FTSE 350 stocks that have an average volume in excess of 600k/day. I have paired stocks within specific industry groups.

I have received some good and helpful advice regarding the program set-up from Pairs Trader for which I am very grateful but I am now looking at the actual trading process.

Back-testing the pairs demonstrates good returns overall but I am finding recent trades are running at significant loss even though they back tested well. I notice also that a number of you have suffered from losses in very recent trades. I have found that in a lot of cases, the spread is showing no sign of reverting back to the mean as it has done in the past and there seems to be a lot of trending of the ratio charts as well.

Is there a fundamental change in the market dynamics at the moment or am I just not finding good trades and not being clever enough with my filtering process? I am using the filtering ideas given by Pairs Trader in various parts of this thread.

Any help or guidance would be greatly appreciated; this is my first go at pairs trading so I am a complete novice.

hi,
I used to do exactly what you're doing using IGIndex on ftse350 stocks, and I suffered exactly the same issue of some bad losers. I've changed my strategy now, but still follow this forum with interest. What I found was that I got stung by stocks that were breaking out, causing a big move from the mean ratio, and they tended to not revert very well. What I was lacking was thorough researching of the pairs in question, like SKC does very well. In reviewing losing trades I found I was tending to pair poor performing stocks (fundamentally earnings/EPSetc..) with good/better ones, hence when one broke out the other didn't necessarily follow. Over the past year they had correlated well (and hence backtested well, good ratio graphs etc..) because both had suffered the same poor economic environment, but one was recovering better than the other. This was bad research on my part.

Good luck on your quest, I hope my experience helps and some of the other experts on here can help.

 

[JohnGP]

Hi Tigger36,

Thank you for your response, your analysis makes perfect sense and suggests that fundamental analysis is in fact very important for pairs trading. I shall do some more research on my failed trades and see if I can make better judgements for new ones.

Up to now, apart from ordinary mutual fund and stocks investments, I have been trading price action at support/resistance using Share Scope. Mainly going long at the moment with some success, I seem to get caught out every time I enter a short trade though even when the main markets are going down! It’s a tricky business!

I became interested in pair trading because on the surface it looks like a way of avoiding losses when the general markets take a sudden turn after speeches by various politicians, Mervin King etc.

I am tempted to use technical analysis to control entry triggers for the long and short sides of the pair. The idea is that if the price moves in the wrong direction, I would be set-up for a better entry the following day. And if it carries on in the wrong direction for some reason such as a breakout I can scratch the trade altogether. Or is this just getting far too complicated?

What strategy are you using now and do you still trade pairs?

 

[tigger36]

Hi Tigger36,

Thank you for your response, your analysis makes perfect sense and suggests that fundamental analysis is in fact very important for pairs trading. I shall do some more research on my failed trades and see if I can make better judgements for new ones.

Up to now, apart from ordinary mutual fund and stocks investments, I have been trading price action at support/resistance using Share Scope. Mainly going long at the moment with some success, I seem to get caught out every time I enter a short trade though even when the main markets are going down! It’s a tricky business!

I became interested in pair trading because on the surface it looks like a way of avoiding losses when the general markets take a sudden turn after speeches by various politicians, Mervin King etc.

I am tempted to use technical analysis to control entry triggers for the long and short sides of the pair. The idea is that if the price moves in the wrong direction, I would be set-up for a better entry the following day. And if it carries on in the wrong direction for some reason such as a breakout I can scratch the trade altogether. Or is this just getting far too complicated?

What strategy are you using now and do you still trade pairs?

I have a day job, so found pairs trading took too much time and I had the sort of problems you mentioned. I also found the cost of the IGIndex spreads took quite a chunk of the profits. As SKC indicates in some of his posts, he looks at 1-2% average gain per trade.
I now follow a medium term stock trading strategy, much of which I gleaned from reading the NakedTrader book (www.nakedtrader.co.uk). I typically hold between 1-3 months and buy strong stocks in strong sectors, based on TA and fundamental research. It's worked well for me this year, account up 96%! It also requires a lot less time than pairs trading.

Pairs trading definitely works nicely, as the guys here have shown, but you have to do your research, watch those news events, and find a cheap broker.

 

[JohnGP]

Hi Tigger36,

I also have a day job so my time is a bit limited for me as well. Unfortunately the day job makes it virtually impossible to trade UK markets during trading hours.

Pairs trading is definitely time consuming during the learning phase but I am determined to give it my best shot. The broker fees do eat into profits though so I may find it difficult to generate a decent profit.

I have been looking at SKCs posts, he is very in touch with the markets and knows what he is doing. I think I am about a million light years behind him at the moment.

You have done very well with your medium term investments, I have been doing something similar but I am only up about 30% or so.

I took a look at the Naked Trader site and have purchased the Naked Trader book, it’s one I have been meaning to get for a while.

Anyway, I don’t think others on this thread will appreciate me waffling on so I would like to say thank you very much for your help and ideas, greatly appreciated. I shall add another post after my next attempt at pairs trading. Thanks again.

 

[SilverRanger]

My first trade in the month:
Long TPI and short BLY, not a good pair to trade fundamentally but the correlation is showing ok. Also missed out earlier today on short CFX / long DXS, could have booked a 2.9% profit easily at market close

Finally had my experimental Japanese pair started, with both companies from the construction sector (18xx), so far it had my brokerage covered. It turns out that the best broker in town for Japanese stocks is MF Global (0.125%), just slightly more than the ASX stocks from other brokers.

 

[SilverRanger]

And for those brokerage cost conscious ASX pair traders, have anyone looked at capitalcfds? It is an UK-based broker offering 0.05% brokerage on Australian 200 shares starting from $5. The cons is probably that it is a market maker and it's relatively new. But for 0.05% brokerage, I think I will give it a try

 

[skc]

And for those brokerage cost conscious ASX pair traders, have anyone looked at capitalcfds? It is an UK-based broker offering 0.05% brokerage on Australian 200 shares starting from $5. The cons is probably that it is a market maker and it's relatively new. But for 0.05% brokerage, I think I will give it a try

Always check who's the financial backer when you sign up for a new CFD provider. Some of them are truely very small fish with lax systems etc. There's a mob in Australia called Sonray which recently folded (google for more). So whatever saving you'd get from slightly cheaper broker must be offset by increased risk of potentially losing all your funds.

BTW if they are market maker then the spread you pay will more than offset the 0.03% broker that you've saved.

 

[SilverRanger]

Always check who's the financial backer when you sign up for a new CFD provider. Some of them are truely very small fish with lax systems etc. There's a mob in Australia called Sonray which recently folded (google for more). So whatever saving you'd get from slightly cheaper broker must be offset by increased risk of potentially losing all your funds.

BTW if they are market maker then the spread you pay will more than offset the 0.03% broker that you've saved.

These guys are backed by London Capital Group, an UK listed financial service company, so it seems a lot more sound than Sonray. But thanks for the warning, I think I should do more research on them before committing.

I always keep a market maker with me to trade "high value" shares like WOW, RIO, BHP and the banks, where I don't care too much about the spread. It works out to save a little for me.

Where did you get 0.08% for brokerage?

 

[SilverRanger]

Forgot to add, another new trade at Friday's market close: Long MGR @ 1.265, short GPT @ 2.880

 

[skc]

These guys are backed by London Capital Group, an UK listed financial service company, so it seems a lot more sound than Sonray. But thanks for the warning, I think I should do more research on them before committing.

I always keep a market maker with me to trade "high value" shares like WOW, RIO, BHP and the banks, where I don't care too much about the spread. It works out to save a little for me.

Where did you get 0.08% for brokerage?

I use MF Global and my account size qualifies me for 0.08%.

IB is also 0.08% but there is no Australian shares for shorting.

 

[SilverRanger]

My first trade in the month:
Long TPI and short BLY, not a good pair to trade fundamentally but the correlation is showing ok. Also missed out earlier today on short CFX / long DXS, could have booked a 2.9% profit easily at market close

Finally had my experimental Japanese pair started, with both companies from the construction sector (18xx), so far it had my brokerage covered. It turns out that the best broker in town for Japanese stocks is MF Global (0.125%), just slightly more than the ASX stocks from other brokers.

Closed BLY/TPI today for 5.2% profit, but the exit is even better as I type this

Need another 7% somewhere in the remaining half of December to get 100% return for the year

 

[SilverRanger]

Closed BLY/TPI today for 5.2% profit, but the exit is even better as I type this

Need another 7% somewhere in the remaining half of December to get 100% return for the year

New trade: Long MCR/ Short MRE, and is already losing money

 

[skc]

New trade: Long MCR/ Short MRE, and is already losing money

Got the same signal but I've taken an isolated long trade on MCR instead of opening up a pair.

MRE released some positive guidance recently and the share price is doing a delayed reaction today. The chart for MCR is looking promising and should play catch up imo.

Of course MRE might retrace 5% tomorrow for all I know...

 

[SilverRanger]

Got the same signal but I've taken an isolated long trade on MCR instead of opening up a pair.

MRE released some positive guidance recently and the share price is doing a delayed reaction today. The chart for MCR is looking promising and should play catch up imo.

Of course MRE might retrace 5% tomorrow for all I know...

If I was to strictly follow my trigger criteria I should have gave this one a miss, since its correlation has been bad recently (currently around 60% and falling!!) But personally I always favour MCR over MRE (and there's always a remote chance of a merger between the two ), and I kinda see MRE being technically stretched...

 

[SilverRanger]

If I was to strictly follow my trigger criteria I should have gave this one a miss, since its correlation has been bad recently (currently around 60% and falling!!) But personally I always favour MCR over MRE (and there's always a remote chance of a merger between the two ), and I kinda see MRE being technically stretched...

Another surge today which got me in pain...I suppose the good news out of the bad is that the board doesn't know why either:
http://www.asx.com.au/asxpdf/20101222/pdf/41vt65sj2t30lr.pdf