ASX Stock Pairs Trade Journal

Gringotts Bank · 14 December 2011

Thanks for that skc.

What about this Jared guy? What's his deal with not answering any emails? Does he reply to your correspondence?

skc · 14 December 2011

Gringotts Bank said:
Thanks for that skc.

What about this Jared guy? What's his deal with not answering any emails? Does he reply to your correspondence?

I have no idea and I hope he's still around.

My last correspondence with him was ~18 months ago.

Gringotts Bank · 25 January 2012

skc, have you seen this?

http://www.youtube.com/watch?v=b-BuYraqfpo&feature=youtu.be

Tell me what you think.

skc · 25 January 2012

Gringotts Bank said:
skc, have you seen this?

http://www.youtube.com/watch?v=b-BuYraqfpo&feature=youtu.be

Tell me what you think.

It looks interesting but it is not for serious traders imo.

When pairs trading real equities I can take early partial profits, take advantage of spikes or funny opening auctions etc. They all add to my win%. And even though I have a high win%, I can't really be sure if my trade will be in profit or not in exactly 1hr / 1 day or 1 wk's time. In this case the time-value of option actually work against you.

The built-in "spread" (or house edge) is pretty massive (like 20%) and I am not sure pairs trading has that much of an edge to overcome the spread.

I do think occassionly you can have a decent chance of winning if you see short term technical resistances/supports that the option pricing model can't / don't take into account. I will take a look at the Australian pair prices during market hrs and see how they move.

But more importantly I would never put any serious money in this unless you are able to quantify your counterparty risk (MF Global anyone?). How much money would you be comfortable giving to these guys, who don't appear to be regulated by any financial authorities?

Having said all that, binaries are growth areas (who doesn't like another way to bet?) so getting to know them may not be a bad investment in knowledge accumulation.

skyQuake · 26 January 2012

20% bonus on first deposit? Sign me up!

skc · 27 January 2012

skyQuake said:
20% bonus on first deposit? Sign me up!

Haven't read the fine prints but, like the free bets that gets offered every now and then from casinos, I doubt you are able to withdraw those!

sinner · 27 January 2012

Hi guys,

I came across this link today while hunting for some spread trading info. Thought you guys might find it very handy!

http://quanttrader.info/public/testForCoint.html

SilverRanger · 30 January 2012

sinner said:
Hi guys,

I came across this link today while hunting for some spread trading info. Thought you guys might find it very handy!

http://quanttrader.info/public/testForCoint.html

Good find, but a google search will get you other ways to do the ADF tests as well (e.g. Excel plugin). The OLS regression can be done in Excel (easy with some form of macro). I suppose the key difference between this system and PTF is that it does not trade dollar neutral, and the result of the cointegration is very sensitive to the period chosen, e.g. it may be cointegrated over 3 months timeframe but not longer.

sinner · 30 January 2012

SilverRanger said:
Good find, but a google search will get you other ways to do the ADF tests as well (e.g. Excel plugin). The OLS regression can be done in Excel (easy with some form of macro). I suppose the key difference between this system and PTF is that it does not trade dollar neutral, and the result of the cointegration is very sensitive to the period chosen, e.g. it may be cointegrated over 3 months timeframe but not longer.

Excel doesn't really hold up to R in terms of this sort of stuff. The dollar neutral issue you mention is only a task of tweaking the example code. The other issues you mention are simply the considerations that come with statistical arbitrage which the trader must be aware of regardless of PTF or homegrown or whatever software is used...right?

SilverRanger · 1 February 2012

sinner said:
Excel doesn't really hold up to R in terms of this sort of stuff. The dollar neutral issue you mention is only a task of tweaking the example code. The other issues you mention are simply the considerations that come with statistical arbitrage which the trader must be aware of regardless of PTF or homegrown or whatever software is used...right?

Excel is nowhere close to R in this sort of stuff, but it's more convenient to use with macros, especially if you are doing this stuff daily on multiple pairs.

You can relax the hedge ratio to be dollar neutral, but that would also mean it will be even harder to find a cointegrated pair! (You are effectively applying a filter to pairs where their hedge ratio naturally offset pthe price ratio)

skc · 1 February 2012

SilverRanger said:
Excel is nowhere close to R in this sort of stuff, but it's more convenient to use with macros, especially if you are doing this stuff daily on multiple pairs.

You can relax the hedge ratio to be dollar neutral, but that would also mean it will be even harder to find a cointegrated pair! (You are effectively applying a filter to pairs where their hedge ratio naturally offset pthe price ratio)

I don't seem to understand any of this stuff you guys are talking about.

Should I be worried??

SilverRanger · 1 February 2012

skc said:
I don't seem to understand any of this stuff you guys are talking about.

Should I be worried??

Not when you are already full time pair trading and making money
My point was really that it's quite a bit of hassle to do co-integration properly, yet the result may not be necessarily better than the simple bollinger band approach

Nice spike on DJS today and yesterday, finally managed to close my DJS/HVN trade, but JHS/HVN is still under water

skc · 1 February 2012

SilverRanger said:
Not when you are already full time pair trading and making money
My point was really that it's quite a bit of hassle to do co-integration properly, yet the result may not be necessarily better than the simple bollinger band approach

Nice spike on DJS today and yesterday, finally managed to close my DJS/HVN trade, but JHS/HVN is still under water

Shorting JBH (just a directional trade) on open today, sorry!

notting · 1 February 2012

Short DLS Long BPT
Think they’re both overpriced but protecting myself with BPT against a mental case market rally.
Sharing. Feel free to tell me how stupid I am as I'm no expert.

Gringotts Bank · 1 February 2012

How do you guys like ASX/SUN today? Look ok?

skc · 1 February 2012

notting said:
Short DLS Long BPT
Think they’re both overpriced but protecting myself with BPT against a mental case market rally.
Sharing. Feel free to tell me how stupid I am as I'm no expert.

Not a pair I keep track but DLS has outperformed BPT by a country mile in the last 4 months. You are trading against the trend of the ratio chart. It doesn't necessarily make it a loser, but you just need to be aware that is the case, and perhaps reassess whether there are fundamental reasons driving the divergence in performance.

There are also talks recently about foreign interests in Australian shale gas/oil assets so I would not go shorting any of the DLS/BPT/SXY etc.

Gringotts Bank said:
How do you guys like ASX/SUN today? Look ok?

Not a pair that I've traded but looks OK... the ASX chart on its own doesn't look like a long and the SUN chart doesn't look like a short. But you never know...

Gringotts Bank · 1 February 2012

thanks skc

notting · 1 February 2012

I can't find a fundamental reason for the exaggerated divergence. Which is why I like it.
I think it's because DLS is a much smaller stock and is just exaggerating the recent uptrend, which will over correct and I will exit. Beach is more diverse and has relatively less in the project that has popped them both.
Am reasonably comfortable trading against the trend with pairs, probably because I don't understand the ratio chart!
I know you divide say BPT by DSL which gives you, I don't know, a down trending spread?
Don't know what the blue line means or what it means when they diverge down or diverge up or come together or cross!!?
I only really get the spread.
Maybe you could explain
ASX and SUN are not a pair as far as I'm concerned as they are too different in their activities.

skc · 1 February 2012

notting said:
I know you divide say BPT by DSL which gives you, I don't know, a down trending spread?
Don't know what the blue line means or what it means when they diverge down or diverge up or come together or cross!!?
I only really get the spread.
Maybe you could explain
ASX and SUN are not a pair as far as I'm concerned as they are too different in their activities.

Yes... BPT/DLS shows a down trending ratio (not spread) curve which basically means that DLS has been rising consistently faster than BPT. Back in Sept the ratio was 2.8. Today the ratio is 1.4.

The blue line is simply the "X" day moving average of the ratio. That is, over the last X days, the average value of BPT/DLS was ~1.6. Divergence is measured as the distance between the green line (the ratio) and the blue line (the moving average of the ratio) in terms of standard deviations. A convergence means that the green line moves back towards the blue and you profit as a result.

Over different timeframe X the blue line will look different and one can pair trade on many different timeframes.

Right now this sector seems to have decent momentum and I would guess that long DLS or BPT alone might yield better outcome than trading them as a pair.

notting · 2 February 2012

Thanks SKC your an Angel.

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