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.
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?
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?
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.
Trade #9 opened - Long SYD @ $2.95. Short AIX @ $2.42. Size = 15%.
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.
Thanks for you replies guysThis is a great thread
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.
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.AIO QRN
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%.
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%.
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