ASX Stock Pairs Trade Journal

[skc]

Charts on trades today.

Trade #8 - AIO/QRN. QRN issued a profit downgrade back in March and share price has been trending down from then. It's ~8% off recent lows but has resistance ahead in the $3.55 region. AIO on the other hand only got caught up in the selling since May and printed a 2 month low today at $4.28, and there are only minor resistances up to $4.6. Profit target for mean reversion is ~6%. With both TOL and QRN in the same sector issuing downgrades I'd exercise a bit of caution and aim for a quicker exit... so anything above 4%.



Trade #9 - SYD/AIX. Pretty good pair to trade with both essentially monopolistic airport owners. The large change in ratio on the chart comes from SYD doing a large capital return late last year. Dividend season coming up and SYD is going ex-div for 11c (3.7%) while AIX has only been paying about 5c (2%). I don't know how AIX gets away with paying such low yields, considering that the Perth Airport is tied to the mining boom while their Athens airport (albeit small in their portfolio) is probably struggling big time. AIX can have shallow market depth sometimes and I sometimes put some low ball cover bids in there just to test my luck. Profit target ~4%.

 

[skc]

EOD state of play.



Exited CHC a bit too early but bids for CHC can disappear quickly without prior warning. WRT also ran back up in the afternoon so a good enough result. I was surprised by the weakness in NWH and ASL today with both finishing on their lows, there was enough range today to close the position, but the movements between the two were a little bit too well synced. Probably should have taken the exit with QBE/SUN when ~3.7% was there to be picked up - instead SUN finished on its high (although right at resistance) and QBE closed near its low. This makes me a bit negative about the pair's prospect.

 

[skc]

Trade #5 - QBE/SUN. SUN has been amongst the strongest performer in financials of late although it broke support at $7.80 2 weeks ago. Today's 4.5% spike up against a flat XFJ just didn't seem right. QBE on the other hand appear to have found support above $12 at least for the time being. Profit target is ~3-4% net movement (basically for SUN to give back the spike).

Out of this one. Sold QBE @ $12.46, covered SUN @ $7.83. Profit = 3.35%

 

[notting]

Short ASL Long BLY just paid again,
As did L PDN S ERA Tuesday

 

[skc]

Trade #10 Opened. Long SEK @ $6.57, short CRZ @ $5.8. Size = 7.5%.

 

[skc]

Trade #11 Opened. Long CPA @ $1.005, Short WRT @ $2.81. Size 15%.

 

[notting]

L MTS S WOW just paid
L ASL S BLY again!! - The machine continues!
I forgot to mention L BLD S JHX, I have a particular affection for this one!

 

[skc]

I forgot to mention L BLD S JHX, I have a particular affection for this one!

I hate this one with a passion. Always get my entry wrong and lose money on sustained divergence. Nothing wrong with the actual pair. It just doesn't like me

 

[Sutekh]

...
L ASL S BLY again!! - The machine continues!
...

I'm new to using this program (demo atm), so I'm sorry if this is obvious, but are you using modified settings? I can't see any signals for this trade; the std dev never seems never to vary very much.

 

[notting]

I hate this one with a passion. Always get my entry wrong and lose money on sustained divergence. Nothing wrong with the actual pair. It just doesn't like me

I usually build into it slowly start small then go sick on it when it looks like divergence is exhausting, because they both have a tendency to run in the wrong directions and BLD is a bit like BPT which reverses hard usually up! So you wanna be their regadless.
It should be noted that JHX is about to pay some kind of special dividend which is what is giving it special strength. If market's are still edgy it should cover it quickly. However, Ben turns the taps on just before it may be a hard one so a little caution required!

 

[skc]

Charts for the day.

Trade #10 SEK/CRZ. Seek and Carsales are really two departments of the old newspaper "rivers of gold" and this pair had good correlation and has been a good performer. CRZ is getting close to all-time high at $5.87, seemingly unaffected by the recent correction, while SEK is off 15% since May but sitting on a decent support ~$6.4. Both companies trade on similar PE multiple. Full mean reversion ~9% but anything above 6% will do.



Trade #11 CPA/WRT. I have traded both CPA and WRT before so the same "lean-on ex-div REIT" strategy applies here. WRT looks poised to move down from recent highs but CPA's chart isn't looking too bullish either. Both closing on the low today so the trade's profit will depend on the speed of fall of each share. Full profit potential is ~4.5%.

 

[skc]

End of Day.

I was expecting weakness today but not this much from the starting bell -otherwise I would have sell to close on open some positions. I also expected some sort of flight to safety towards the REITs and infrastructure (i.e. airports) but they were sold down just the same.



4 closed trades. 7 still open. Total P&L 1.21% for the week so not a bad start. Yes, 1.21% is nothing to write home about but average that for the next 50 weeks and you'd have done pretty well for the year.

 

[spec]

End of Day.

I was expecting weakness today but not this much from the starting bell -otherwise I would have sell to close on open some positions. I also expected some sort of flight to safety towards the REITs and infrastructure (i.e. airports) but they were sold down just the same.

View attachment 47360

4 closed trades. 7 still open. Total P&L 1.21% for the week so not a bad start. Yes, 1.21% is nothing to write home about but average that for the next 50 weeks and you'd have done pretty well for the year.

Nice results !!! Keep posting. I learned a lot from you posts.

 

[nulla nulla]

Trade #9 - SYD/AIX. Pretty good pair to trade with both essentially monopolistic airport owners. The large change in ratio on the chart comes from SYD doing a large capital return late last year. Dividend season coming up and SYD is going ex-div for 11c (3.7%) while AIX has only been paying about 5c (2%). I don't know how AIX gets away with paying such low yields, considering that the Perth Airport is tied to the mining boom while their Athens airport (albeit small in their portfolio) is probably struggling big time. AIX can have shallow market depth sometimes and I sometimes put some low ball cover bids in there just to test my luck. Profit target ~4%.

View attachment 47346

I previously thought, by "pairs trading", you were trading the divergence between like shares. You are actualy trading one of the pair long and hedging the trade with a short on the other. I guess this reduces the risk.

Win win would be when you get both right for your 4% over a short period, which would represent a greater percentage when annualised over the fiscal year (1 in 4 probability). Lose would be when both go sour (1 in four probability), break square or lesser profit when one wins & one loses(2 in 4 probability).
All in all you have a 3 in 4 likelihood of regular small gains compounding over a year.

We follow the ups and downs in reit's and infrastructure but don't short (hedge). We tend to swing between them in respect of whichever one appears to be oversold (in comparison with the other like shares) at the time we are ready (cashed up) to re-enter. Other trades are pretty much sticking with the same share. At the point we sell, having reached our target exit, we lodge a low ball bid where we consider the share price will likely return after the spike.

With some, we have rolled the funds from the previous trade back in, picking up incrementaly more shares each time. Like your system our small margins of 1.5% - 3% per trade compound significantly over the fiscal period.

Cheers.

 

[Huskar]

SKC how do you calculate the price move required on either pair for reversion to the mean (ie your profit target)?

I am thick as a doorpost and can't work it out .

 

[fingl]

Hey guys,

For guys use hedge ratio how erratic is the ratio using say 200 look back? Do you guys adjust according when the hedge ratio change forwardly? Is comparing to option delta adjustment

 

[skc]

I previously thought, by "pairs trading", you were trading the divergence between like shares. You are actualy trading one of the pair long and hedging the trade with a short on the other. I guess this reduces the risk.

I am still trading divergence between like shares. The program signal alerts me to a statistical divergence, but these days I tend not to take the signal straight away. I wait for prices to enter zones of support / resistance / congestion and lean against those. And this usually offers me better entry prices - actually, I pretty much only enter if the entry prices are better. "Hedged trading" however is not a bad description and you can probably do that even if you don't run your pairs through any statistical analysis. But I do think the combination of sensible pairs, statistical divergence and basic chart reading improves performance.

We follow the ups and downs in reit's and infrastructure but don't short (hedge). We tend to swing between them in respect of whichever one appears to be oversold (in comparison with the other like shares) at the time we are ready (cashed up) to re-enter. Other trades are pretty much sticking with the same share. At the point we sell, having reached our target exit, we lodge a low ball bid where we consider the share price will likely return after the spike.

With some, we have rolled the funds from the previous trade back in, picking up incrementaly more shares each time. Like your system our small margins of 1.5% - 3% per trade compound significantly over the fiscal period.

I like your strategy and I think you've picked the perfect sector to run it in. I do often wonder if I can pick up a few percent here and there without the corresponding opposite "hedge" - it would certainly be more economical when it comes to commission, margin used etc. But while it may be easy to spot one REIT being oversold, it's not necessary that it must go back up... others can come down.

Another key factor is where to put the stop (assuming your strategy does employ one) - with a small profit target one needs high win %, and with high win % you can either be very good at "predicting" where price goes, or you need a pretty wide stop. With small stops you will just get taken out of the trades a lot, hurting the win %. Pairs trading takes a lot of the negatives of tight stops out of the equation. It doesn't matter if the long position falls 5% (which may trigger a tight stop on a naked long trade), as long as the short has moved as well. So if I was to model your long-only strategy it will take me a lot more research to think about the effects of stops and risk management.

SKC how do you calculate the price move required on either pair for reversion to the mean (ie your profit target)?

The profit target is simply what the current ratio is vs what the N-day moving average of the ratio is (N being the parameter you set for the pair). So say N = 30 and ABC/XYZ = 2.5 while over the last 30 days that ratio has averaged 2.75, the "convergence target" is 10%. Over time, the moving average will change so the target will also move.

Nice results !!! Keep posting. I learned a lot from you posts.

Thanks for spending your first post on me... you will never get it back!

 

[SilverRanger]

Glad to still see this post alive (great work skc ) Interestingly I have similar pairs open atm: CFX/WRT, AIO/QRN, CPA/WDC. SYD/AIX was also on my list but I turned away because I was afraid of more asset sale news out of AIX.
SEK/CRZ looks like a good signal (didn't have it on my list for some reason), see if I can get in first thing today...
Now just another 1.5 hour to go for England vs France!

 

[nulla nulla]

I like your strategy and I think you've picked the perfect sector to run it in. I do often wonder if I can pick up a few percent here and there without the corresponding opposite "hedge" - it would certainly be more economical when it comes to commission, margin used etc. But while it may be easy to spot one REIT being oversold, it's not necessary that it must go back up... others can come down.

Another key factor is where to put the stop (assuming your strategy does employ one) - with a small profit target one needs high win %, and with high win % you can either be very good at "predicting" where price goes, or you need a pretty wide stop. With small stops you will just get taken out of the trades a lot, hurting the win %. Pairs trading takes a lot of the negatives of tight stops out of the equation. It doesn't matter if the long position falls 5% (which may trigger a tight stop on a naked long trade), as long as the short has moved as well. So if I was to model your long-only strategy it will take me a lot more research to think about the effects of stops and risk management.

I was going to ask you whether you used stops but you have answered that now. We don't use stops.
When determining our entry we are influenced by:
previous trend support areas;
general market sentiment;
sector sentiment;
any news specific to the share; and
proximity timing for dividends.

It is not uncommon for the share price to dip below our entry price (getting the bottoms and tops right is never perfect) and in the right circumstance we will double up taking a further trade. Yes, reit's and infrastructure are the perfect sectors, in our opinion, for our style of trading.

Thank you for drawing our attention to AIX, we have traded map/syd for many years but for some reason overlooked AIX. It has now been added to our watch list.

Cheers.

 

[skc]

I was going to ask you whether you used stops but you have answered that now. We don't use stops.
When determining our entry we are influenced by:
previous trend support areas;
general market sentiment;
sector sentiment;
any news specific to the share; and
proximity timing for dividends.

It is not uncommon for the share price to dip below our entry price (getting the bottoms and tops right is never perfect) and in the right circumstance we will double up taking a further trade. Yes, reit's and infrastructure are the perfect sectors, in our opinion, for our style of trading.

Thank you for drawing our attention to AIX, we have traded map/syd for many years but for some reason overlooked AIX. It has now been added to our watch list.

Cheers.

I do have stops but they are not price-level based in the usual manner. They are time-based and max loss based. I am uncomfortable trading without stops in directional trades (or any trade for that matter) especially in this market... but the wrong use of stops can also be detrimental to performance for sure.

BTW - who are "we" that you speak of.

Glad to still see this post alive (great work skc ) Interestingly I have similar pairs open atm: CFX/WRT, AIO/QRN, CPA/WDC. SYD/AIX was also on my list but I turned away because I was afraid of more asset sale news out of AIX.
SEK/CRZ looks like a good signal (didn't have it on my list for some reason), see if I can get in first thing today...
Now just another 1.5 hour to go for England vs France!

Good to see you here, SilverRanger. Having fun with the volatility?

I'd be worry for AIX to announce that the Athens airport has been burnt down by riot crowds...