ASX Stock Pairs Trade Journal

[notting]

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.

Very good advice.
One thing you need to be careful of if your not doing the above is to remember that pairs trading tends to be counter trend so stocks may be showing relative strength or weakness for a good reason that is not yet taken on by the full market particapation!

L AMP S SUN just paid!

 

[PinguPingu]

What do you do when the divergence keeps going (so that you're losing money on both trades)? Do you have a stop level where you exit and try to time a better entry?

 

[notting]

What do you do when the divergence keeps going (so that you're losing money on both trades)? Do you have a stop level where you exit and try to time a better entry?

Usually I become discretionary about it.
I'll sometimes build more into one of the positions that I think is more irrational than the other, and lose a bit of the one I least like when it has positive days. I rarely just exit both as an over all stop. You get quite a bit of room to muck around unless there is a takeover or capital raising which pretty much stuffs you up so you need to take that possibility into account with position size.
Also if the markets having an extreme day and overseas markets have all done the same for the night before I'll take some profits in line with the exteme usually the market corrects back to some degree and you can even up the sizing again. Sometimes I'll feel awful about taking one of the positions so just fill one of them and wait a little for the other. For some reason my feeling works well with pairs, it's much hard trying to sense that with naked longs and shorts even though it's kind of the same thing in that case. Somehow the pair relative assists with keeping a poise even if you just take one of them and over all I do not like the stock fundamentally as much as the other and it is the long!! Not for everyone I'm sure.
It but it works for me!
I'll also give myself room to triple up in volume each way to then make the descretionary exits when they appear. So a fair bit has to go wrong before you have to take a full loss.

 

[sinner]

What do you do when the divergence keeps going (so that you're losing money on both trades)? Do you have a stop level where you exit and try to time a better entry?

On a purely mechanical basis you do nothing until the spread mean reverts and then you exit the position, regardless of whether it's in profit or loss.

 

[skc]

What do you do when the divergence keeps going (so that you're losing money on both trades)? Do you have a stop level where you exit and try to time a better entry?

On a purely mechanical basis you do nothing until the spread mean reverts and then you exit the position, regardless of whether it's in profit or loss.

Some discussion on stops around this post. Everyone would be different of course.

https://www.aussiestockforums.com/f...=14508&page=23&p=529612&viewfull=1#post529612

 

[skc]

Trade #9 opened - Long SYD @ $2.95. Short AIX @ $2.42. Size = 15%.

Trade #9 closed. Sold SYD @ $2.95. Covered AIX @ $2.33. P&L = +3.72%.

New trade #12 opened. Long PNA @ $2.69, Short OZL @ $8.48. Size = 10%.

 

[nulla nulla]

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

My Spouse, Head Honcho, better half, She who must be obeyed. Makes for some robust discussions from time to time but it appears to work.

 

[skc]

Chart for today.

Trade #12. PNA/OZL. On the charts, PNA is sitting somewhat dangerously on support around current levels, while OZL is in a bit of no man's land between $8 and $9. The recent evening star however suggests potential move down. Fundamentally, OZL has a sizeable cash in relation to market cap and is doing buyback on-market so the pair is more likely to perform if the overall market trends up (although I don't actually have a firm view for that). Profit target is ~4.5% compared to full mean reverion of 6%.



End of day status.



Good converging day on ALZ/WDC and decent moves on a couple of other pairs. SYD/AIX is a tick shy of profit but I will be away from the screen from time to time for the rest of the week so there's no point not taking the win.

5 good closed trades so far. 7 open trades basically at breakeven.

 

[skc]

My Spouse, Head Honcho, better half, She who must be obeyed. Makes for some robust discussions from time to time but it appears to work.

Nice. If I had to trade with my wife I would have gone through about 6 of them by now.

 

[PinguPingu]

Thanks for you replies guys This is a great thread

 

[blue0810]

Thanks for you replies guys This is a great thread

+1

Hate “Compare the Pair” – Industry fund Ad
Love “ Trade the Pair “ – great thread

 

[Huskar]

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.

Thanks SKC

The moving average age was what was tricking me

 

[notting]

Got heavier in S JHX and L BLD looks to be exhausting remembering the larg div payout coming form JHX treating it as taken out of the price.

 

[skc]

EOD P&L



Down a few bucks today mostly on SEK losing 2.5%. It announced that their sub notes are dead (those notes were such a rip off anyway so I am not surprised) and the market didn't seem to like it. Funny though the market also didn't like the initial announcement of SEK issuing those notes. So I am taking a netural stance on this development.

I was away from the computer for most of the afternoon so missed an exit on AIO/QRN. Hopefully there'd be another opportunity tomorrow.

 

[SilverRanger]

Lol I didn't even notice there was an exit signal on AIO/QRN/

Opened NWH/ASL today, it's quite a volatile pair so I waited to see higher divergence (8% from mean) for entry.

Missed out on MRM today, might do it with WOR or MND tomorrow if I don't find anything suspicious tonight (and of course assuming the boat is still there!)

 

[notting]

AIO QRN

I sold my short on AIO this morning flipped the long on QRN a couple of days ago and made money on shorting it as well! From memory I did lose a bit on the long QRN.
Just to keep my ego in check am still long COK and building, for a take over when it comes. I almost don't care if I end up with everything in it!

 

[skc]

Trade #13 Opened. Long CPB @ $52.44 Short MND @ $21.88. Size = 15% of account.

 

[skc]

Left this out yesterday.



Couldn't be at my desk yesterday until 2pm and there wasn't much action from then.

This is one of the negative of pairs trading (or my brand of it anyway) - to make the most of it you really need to be glued to the screen.

 

[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 #8 closed. Sold AIO @ $4.29. Covered QRN @ $3.32. P&L 3.3%.

Not the best exit in the world but AIO has fallen below a recent ledge yesterday, while QRN still has some support to lean on around this price level. The QRN chart probably warrants a naked short - but I don't want to be nake in anything heading into G-day weekend.

 

[skc]

Chart for today.

Trade #12. PNA/OZL. On the charts, PNA is sitting somewhat dangerously on support around current levels, while OZL is in a bit of no man's land between $8 and $9. The recent evening star however suggests potential move down. Fundamentally, OZL has a sizeable cash in relation to market cap and is doing buyback on-market so the pair is more likely to perform if the overall market trends up (although I don't actually have a firm view for that). Profit target is ~4.5% compared to full mean reverion of 6%.

Trade #12 Closed. Sold PNA @ $2.73. Covered OZL @ $8.25. Profit = 4.32%.