ASX Stock Pairs Trade Journal

[skc]

Trade #38. Long DXS @ $0.915. Short GPT @ $3.35. Size 15%.

Trade closed. Sold DXS @ $0.93. Covered GPT @ $3.31.

 

[skc]

EOD. Account plodding on the spot.

 

[skc]

AGO/MGX - Small iron ore miners both hit hard by the down turn. MGX had a very nice bounce of late (up 15% from the bottom) while AGO has lagged a bit (only up 9%). Full convergence ~10% but only looking for ~5% as both pairs can be volatile. This pair should move into profit quickly if the market falls tomorrow.

Trade closed. Sold AGO @ $1.9125. Covered MGX @ $0.945. P&L = -2.96%.

I watched FMG fall all day and thought that other iron ores would be dragged down along so I sold a fair portion o fit in the morning. MGX also released its quarterly which I wasn't expecting - evidently the quarterly was reasonably positive and it's held up well considering the market. AGO is now making new lows so time to let the trade go.

Trade #22 Long IOF @ $2.685. Short GMG @ $3.745. Size 15%.

Trade closed. Sold IOF @ $2.735. Covered GMG @ $3.775. P&L = 1.38%.

The trade has reach its expiray. Not a great trade and certainly not good exits. I've got signal to short GMG against many REITs but I was tied up in this trade with IOF not really doing a lot.

I am in the process of moving trading account, so it's a reasonably place to end this journal. I will report the close of the 2 remaining trades and do some post-journal analysis.

 

[CanOz]

I truly admire you success SKC. I wish i had the desire to trade this way. Well done, great thread too!

You're gettin it done!

CanOz

 

[skc]

EOD. Still plodding along.

I truly admire you success SKC. I wish i had the desire to trade this way. Well done, great thread too!

You're gettin it done!

CanOz

Thanks Can. I wish I have the desire to trade futures short term where you can walk away whenever. For me to have zero open trades and take a 1 week holiday, I need to stop taking trades two week beforehand.

And good luck with your quest. May the force be with you.

 

[fingl]

hi do you adjust and normalize you each position size across your portfolio?
atr is not really a good predictor of futures p/l. The variation is alot and adjust the position size might not be useful.

 

[skc]

hi do you adjust and normalize you each position size across your portfolio?
atr is not really a good predictor of futures p/l. The variation is alot and adjust the position size might not be useful.

Fingl,

As I said I adjust my positions based on volatility and liquidity. If a pair can go through large gyrations I tend to keep the position size small to keep the risk low. I don't have hard mathematical formula to guide position sizing - it is more intuition + knowing how the particular stock tend to behave.

I can't answer re: ATR specifically but I wouldn't think it's a predictor of future profits anyway. You might use ATR (of the ratio) as a guide to position sizing. E.g. ATR of the ratio is 4% per week and your average holding time is 2 weeks. You might say that a 10% change is ratio is about as bad as you would cop it, and size your position accordingly. But it wouldn't be perfect as with most things in life.

 

[Tails]

SKC,

A great thread that I have read back to front on numerous occasions. I have followed your journey during the past 6 odd weeks and have learned a lot from it. Thanks for sharing your trades during this time period and the rationale behind them.

 

[skc]

Sorry I've been busy on a number of fronts and it's time to wrap up this thread. I will exit the two remaining pairs using the closing price today.

Trade #34 closed. Sold CSL @ $39.66. Covered RHC @ $24.01. P&L = -2.96%.
Trade #35 closed. Sold BOQ @ $6.81. Covered BEN @ $7.98. P&L = -1.99%.

This allows me to do some overview of results and analysis and wrap the journal up in the next few posts.

SKC,

A great thread that I have read back to front on numerous occasions. I have followed your journey during the past 6 odd weeks and have learned a lot from it. Thanks for sharing your trades during this time period and the rationale behind them.

Thanks for your kind words and welcome to the forum .

 

[skc]

End of Journal.



41 trades in 6 weeks and net profit of 7.55%. 32 wins vs 9 loss for a win% of 78%. Avg win is slightly larger than average loss and that's much better than what my own trading has been. One large loss would blow this ratio out since the absolute number of losses tend to be small. Total commission paid $1570 which was 20% of P&L.

Overall it was an efficient period of trading. No single large loss and good win ratio. Not all periods will be like this, however.

 

[skc]

This series of charts are all pretty self-explanatory. They look at P&L a number of different ways.

The "P&L by date" shows the account value based on daily closing prices. It is more volatile than the "P&L by trade" curve which tallied the P&L only after the trade is closed. Notice all the dips that can be seen on "P&L by date" which illustrated how some pairs do diverge a fair bit before converging. On the P&L you will also notice that there were 19 wins in a row from Trade #15 to #33, followed by 4 straight losses. I do find that these runs occur more often than the statistics suggest (With 78% win rate, 19 wins in a row has a 0.9% probability of occuring, while 4 losses in a row has a 0.2%) - and I suspect it has something to do with psychology but that theory is untested.

The key takeaway here is accumulation of small wins at a high accuracy while avoiding major holes where you can.

 

[skc]

The next series of charts explore the trades in more detail.

Ratio % change vs trade size
This attemps to show how well/not well the position sizing has worked. Ideally, large ratio % change should be confined to the lower half of the charts where position sizes are small. Too many dots on the top left corner means that you are not reducing position size for the more volatile pairs.

Trade P&L vs Days open
This shows that the majority of the good easy wins come within 10 days, and the statistical edge is a lot less at 10+ days with win% falling below 50%.

Cumulative P&L at today's price
To produce the red line on this chart, I plug in today's closing share price as the exit price for all the trades. It is purely an academic exercise to show that pairs trading money are made thanks to the volatility of the stock. You don't need to hold and let profit run - as chances are much of the convergence / mean reversion don't last long.

Performance by exit type
I've categorised all 41 trades by their exit type. Target met, early profit taken, time-based stop (usually holding >2 weeks), chart stop (where I had a mental price-based stop based on support/resistance), scratched (trades that shouldn't have taken) and event (e.g. the PTM profit guidance). Note again that most profits are in the first two columns. The rest of the categories are not about profit, but risk control. Get one event wrong and you will pay for it over the next 40 trades.

 

[skc]

So, I hope people have enjoyed my musing over the last 6 weeks or so. Remember there are many ways to pairs trade and what I've shown in the journal is definitely not the only way or the most profitable way. Take what is useful and discard what isn't to you, and share your pairs trading here.

 

[Sutekh]

So, I hope people have enjoyed my musing over the last 6 weeks or so. Remember there are many ways to pairs trade and what I've shown in the journal is definitely not the only way or the most profitable way. Take what is useful and discard what isn't to you, and share your pairs trading here.

Wow! Thanks again for taking the time to update your journal skc, especially with the detailed analysis of the trades. I think it's a very valuable exercise. If you continue with pairs trading best of luck!

 

[spec]

So, I hope people have enjoyed my musing over the last 6 weeks or so. Remember there are many ways to pairs trade and what I've shown in the journal is definitely not the only way or the most profitable way. Take what is useful and discard what isn't to you, and share your pairs trading here.

Awesome results !!!
Did you perform backtesting in order to choose your universe of pairs. Can you share your criteria (profit per trade, % win etc. ) with us ?

Thanks again

 

[skc]

Did you perform backtesting in order to choose your universe of pairs. Can you share your criteria (profit per trade, % win etc. ) with us ?

Thanks again

When I first started my pairs list was derived solely from backtesting. There wasn't a fixed criteria but I picked out the top ones in each sector as long as they are say >$300 per trade (for $10000 trade size) and >70% win%. It is probably a good idea to do that if you are just starting out.

But over time I start to rely more on knowing about the companies. As long as the companies are fundamentally correlated I will assess the trade on its own merit without necessarily thinking too much about how well they'd backtest.

 

[fingl]

As I said I adjust my positions based on volatility and liquidity. If a pair can go through large gyrations I tend to keep the position size small to keep the risk low. I don't have hard mathematical formula to guide position sizing - it is more intuition + knowing how the particular stock tend to behave.

skc from your chart you put up you did a good job on tuning to future volatility. Do you measure or use the 100 ma
to guide the gyration amount? And knowing how the stk behave is referring to how the stk behave on funde news are purely on how the price behave?

 

[skc]

skc from your chart you put up you did a good job on tuning to future volatility. Do you measure or use the 100 ma
to guide the gyration amount? And knowing how the stk behave is referring to how the stk behave on funde news are purely on how the price behave?

Just purely on knowing how the price behave. How often do you expect to see a 5% daily move? Most days, once a week, few times a month or once in a blue moon?

Sometimes a stock will surprise you by putting in a large move, but by and large past ranges are good guides to the future.

 

[fingl]

skc,

On the exit chart for chart base exit the red column is negative 10%. Does this mean those trades using the chart base exit return is 10% less compare to normal exit? What does PTM mean?

How much improvement on your trades return for those trades using discretionary exit? Suppose discretionary exit improve your return using other tools would not mean you are suit for discretionary chart trading? Why don't you have a thread talking about your transition from number selection trading to more intuitive trading about the difficulties, pitfalls and your strength? Did a study on how news affect the price and the result is not much different. The number of times for favoring news improve price compare to unfavoring news is about same with favoring news a little more

View attachment 47958

The next series of charts explore the trades in more detail.

Ratio % change vs trade size
This attemps to show how well/not well the position sizing has worked. Ideally, large ratio % change should be confined to the lower half of the charts where position sizes are small. Too many dots on the top left corner means that you are not reducing position size for the more volatile pairs.

Trade P&L vs Days open
This shows that the majority of the good easy wins come within 10 days, and the statistical edge is a lot less at 10+ days with win% falling below 50%.

Cumulative P&L at today's price
To produce the red line on this chart, I plug in today's closing share price as the exit price for all the trades. It is purely an academic exercise to show that pairs trading money are made thanks to the volatility of the stock. You don't need to hold and let profit run - as chances are much of the convergence / mean reversion don't last long.

Performance by exit type
I've categorised all 41 trades by their exit type. Target met, early profit taken, time-based stop (usually holding >2 weeks), chart stop (where I had a mental price-based stop based on support/resistance), scratched (trades that shouldn't have taken) and event (e.g. the PTM profit guidance). Note again that most profits are in the first two columns. The rest of the categories are not about profit, but risk control. Get one event wrong and you will pay for it over the next 40 trades.

 

[skc]

skc,

On the exit chart for chart base exit the red column is negative 10%. Does this mean those trades using the chart base exit return is 10% less compare to normal exit? What does PTM mean?

The red% columns are % of the total P&L for the account. So for the account having made $7500, "target" accounted for ~70% of that (or $5250), while "chart stop" accounted for -10% of that (that is, a loss of ~$750). The red% columns add to 100%.

PTM was the stock I was long which released an earning guidence unexpectedly.

How much improvement on your trades return for those trades using discretionary exit?

This is not something I have a hard figure on. But I know my own trading overall is more profitable than the system (with whatever current parameters I have) - mostly because of better entries and the rest due to better exits. I also regularly re-enter after taking early profits, or I switch one side of the pair etc. Plus cutting some pairs allow me to move on and open other new pairs. So any quantification is inexact anyway.

May be optimising the system parameters will render my discretionary interference pointless... but I am in the process of increasing my total profits by expanding my trade size, rather than optimising the system. It's a much easier way.

Suppose discretionary exit improve your return using other tools would that not mean you are suit for discretionary chart trading?

May be but that hasn't been the case. I do take some directional trades but without nearly the same profiability as my pairs trading. The skills are some what transferable but the trading parameters will be very different.

For example, AAA has fallen to support while BBB is rising to resistance and the signal asked me to long AAA and short BBB. That's decent trade considering the set up. As a pair this trade can be profitable with AAA drifting around support while BBB falling sharply, or it can have AAA bouncing off support strongly and BBB being held back by the resistance. I don't know which scenario will play out so going long AAA or going short BBB alone will have very different reward / risk profile.

The other reason is directional trade requies fixed price-based stops - often a directional trade mis-behave for a few days, stopping you out in the process, before it gets going again. May be it's just a case of me being bad at stop placements. But imo pairs trading is far more forgiving as is has a more flexible risk management approach that aren't as rigid in terms of price behaviour.

Why don't you have a thread talking about your transition from number selection trading to more intuitive trading about the difficulties, pitfalls and your strength? Did a study on how news affect the price and the result is not much different. The number of times for favoring news improve price compare to unfavoring news is about same with favoring news a little more

I think most people will struggle to articulate those succinctly without being a professional writer. Tacit knowledge is difficult to express.