ASX Stock Pairs Trade Journal

[edman79]

Hi SKC,
I entered Long BLY short FGE on friday. Thinking BLY would have some support at $2.40

1. Can you give me reasons why you would/would not have taken this trade.

2. How would you manage this trade from now - currently down %7.7

These are the questions that reglarly arise when I take a bad trade - should I have taken it/how do I avoid it in the future and what to do with it once it turns bad.

Thanks.

 

[skc]

Hi SKC,
I entered Long BLY short FGE on friday. Thinking BLY would have some support at $2.40

1. Can you give me reasons why you would/would not have taken this trade.

2. How would you manage this trade from now - currently down %7.7

These are the questions that reglarly arise when I take a bad trade - should I have taken it/how do I avoid it in the future and what to do with it once it turns bad.

Thanks.

1. Looking at the ratio chart alone it is a trade that I would have taken as well. Looking at a BLY chart, you can see $2.60 is a key level. A long of BLY on Friday would also seem sensible - the market was looking respectable and I would have expected a retest of at least $2.60. The short FGE on Friday also doesn't look too bad. So it is completely sensible to have taken the trade.

2. You manage this trade same as you would any other trade. Observe your stops ($ loss, time based or other) like you normally would. Also note that they are reporting in 2 weeks time - so decide for yourself whether holding over reporting times is part of your strategy.

BLY is not a small stock but it often behaves like one... it can move >5% daily in either direction with plenty of ease. And FGE is a bit thin and 2-3% daily moves are also nothing to write home about. So with the BLY/FGE pair, a 7.7% open loss should not be unexpected, as much as it suks. You manage that by sizing your position accordingly. I would have had no more than 10% of the account per side on this pair, so the absolute loss relative to account should really be <1%. That is, it should not be something you need to worry about in the whole scheme of things.

Having said that I am very surprised at the weakness showed by BLY in the last 2 day considering what the overall market has done... may be they were dragged down by the CPB AGM comments that drilling activities by small explorers are expected to fall.

 

[edman79]

Observe your stops ($ loss, time based or other) like you normally would.

Thanks for the advice.
What have you found to be good stops when a trade just doesnt want to come back?
From extensive back testing I am yet to find a $ or time based stop that improves the system. So it seems any absolute stop might be better for the mind than the wallet.

 

[skc]

Thanks for the advice.
What have you found to be good stops when a trade just doesnt want to come back?
From extensive back testing I am yet to find a $ or time based stop that improves the system. So it seems any absolute stop might be better for the mind than the wallet.

Absolute $ stop is an absolute must have. It is for the wallet as much as for the mind. Imagine you have long BNB short MQG and decide not to close it... Time based stop depends on your own parameters and probably various depending on the pair. But the longer you hold, the higher the chance that you will run into some event/news that you are trying to avoid.

To be honest, even if the stop is only for the mind it may still work out better for the wallet. It allows you to move on from a poor trade and take the next 100 trades. A bit like breaking up with a lousy girlfriend...

P.S. Not advice. Just opinions

 

[edman79]

I had a lousy girlfriend once, so I married her... ha ha what does that say about my trading?
I guess my point is that although I havent seen a BNB chart even BNB probably offered an exit signal on PTF. Stocks almost never trade straight up or down and once the bad news came it would have been too late. Just some thoughts... dont stress skc I wont sue you if any of your "opinions" are detrimental to my trading

 

[SilverRanger]

God knows what happened to BLY today, plunging 11% for no apparent reason!

 

[skc]

God knows what happened to BLY today, plunging 11% for no apparent reason!

Yup. Friday was tough to watch for BLY/FGE (or BLY/anything). There was a pretty big and desperate seller that just took all the bids available. Reverse speeding ticket today with the expected answer and prompted at least a short term reversal.

It all depends on whether the seller had finished offloading.

 

[notting]

Now I think I'll start inching into longing JHX 7.60 and shorting BLD 3.50

 

[skc]

Now I think I'll start inching into longing JHX 7.60 and shorting BLD 3.50

BLD reporting 22 August. They've already provided guidance recently so one shouldn't expect too many surprises.

But as we know with the stock market - don't be surprised by surprises...

 

[notting]

Yes! Trading the suprise is most profitable!
e.g. 'Oh that is rediculously cheap I have to buy it.' "Go short"
The self contrarian 90% winning club.

 

[SilverRanger]

Yes! Trading the suprise is most profitable!

Only if you get the direction right, just take DOW and UGL for example this month...

Putting myself on holiday mode til the reporting season is over...

 

[SilverRanger]

Yup. Friday was tough to watch for BLY/FGE (or BLY/anything). There was a pretty big and desperate seller that just took all the bids available. Reverse speeding ticket today with the expected answer and prompted at least a short term reversal.

It all depends on whether the seller had finished offloading.

Glad it all ended well for those brave hearts who fought on...

 

[skc]

Only if you get the direction right, just take DOW and UGL for example this month...

Putting myself on holiday mode til the reporting season is over...

Definitely. 8-10% moves seem to be the standard on Day 0. The pairs trading edge is too thin to withstand too many of these. Read the report and just trade in the direction of the report and you can get a pretty decent 3-5% move which is probably as good as a pairs trade.

Although I am not actually on holiday - just sidestepping them the best I can.

Glad it all ended well for those brave hearts who fought on...

Brave when it worked out. Foolish when it didn't. If I held I really wouldn't be sure that I'd hang in there. The selling was just so aggressive.

 

[SilverRanger]

Brave when it worked out. Foolish when it didn't. If I held I really wouldn't be sure that I'd hang in there. The selling was just so aggressive.

Well, I was in it and I can tell you it wasn't an easy decision to make. Although it was helpful that I only entered half the normal position size initially (knowing it's BLY, that seems logical), so there's more room to take losses in absolute terms.

 

[fingl]

skc,

What do you do when the stk gap not one stk but both in unflavor of your trade direction?

And about news how do you differentiate the level of news significant that would have impact on the trade ?

 

[skc]

skc,

What do you do when the stk gap not one stk but both in unflavor of your trade direction?

And about news how do you differentiate the level of news significant that would have impact on the trade ?

When both stock gap on you in the wrong direction, there's not much you can do but cry... ... while sticking to our existing trading plan (hopefully a profitable one) and think about the next 100 trades.

Re News:

If I can give you useful answer in this post on how to assess all news quickly and accurately all the time - I'd be a trillionaire. The only thing useful I can say is - avoid stepping on news the best you can, and get out if you don't know how to interpret the news.

 

[fingl]

When both stock gap on you in the wrong direction, there's not much you can do but cry... ... while sticking to our existing trading plan (hopefully a profitable one) and think about the next 100 trades.

Re News:

If I can give you useful answer in this post on how to assess all news quickly and accurately all the time - I'd be a trillionaire. The only thing useful I can say is - avoid stepping on news the best you can, and get out if you don't know how to interpret the news.

skc, what about try to buy or sell more on gap? may be riskier

 

[skc]

skc, what about try to buy or sell more on gap? may be riskier

It is not something I do as a routine, but if that is your plan, and that it still confers to your risk limits, and that you know the stock in questions tend to close its gaps... then sure why not.

 

[SilverRanger]

Opened a new trade today while waiting for the reporting season ends: long IGR, short SLR, IGR is currently under all-script takeover by SLR, offering 6.28 IGR for 1 SLR share.

IGR currently trades at 0.445, while the implied value of the takeover is 0.466 (SLR currently trades at 2.93). There's some 4.8% profit to be milked if the deal completes successfully.

IGR board intends to unanimously recommend the offer and is currently waiting for independent expert's report.

The deal is expected to be finalised by December, but my target exit will probably be much earlier than that.

 

[skc]

Opened a new trade today while waiting for the reporting season ends: long IGR, short SLR, IGR is currently under all-script takeover by SLR, offering 6.28 IGR for 1 SLR share.

IGR currently trades at 0.445, while the implied value of the takeover is 0.466 (SLR currently trades at 2.93). There's some 4.8% profit to be milked if the deal completes successfully.

IGR board intends to unanimously recommend the offer and is currently waiting for independent expert's report.

The deal is expected to be finalised by December, but my target exit will probably be much earlier than that.

Traded this on the open on the first day. Managed about 5%.

See recent ALD / SBM on how long it takes the prices to converge.