ASX Stock Pairs Trade Journal

[SilverRanger]

Hi skc, nice to see you around

Lately AREITs, utilities and stables are the only sectors I'm trading at the moment, completely given up on resource, mining services and media...

On the other hand, pair trading HK stocks seem to work a lot better for me nowadays. If only they can bring down the brokerage costs and I'm all in!

 

[edman79]

Hi skc, nice to see you around

Lately AREITs, utilities and stables are the only sectors I'm trading at the moment, completely given up on resource, mining services and media...

On the other hand, pair trading HK stocks seem to work a lot better for me nowadays. If only they can bring down the brokerage costs and I'm all in!

SilverRanger,

Are you pair trading HK stocks? I looked into them and they backtest well, but at ~0.2 - 0.25% commission it seems almost impossible to pair trade. ~1% per pair trade(round trip) commission costs would put me out of the picture. What is your expectancy on the HK markets? or are you getting a good commission somewhere?

Ed.

 

[SilverRanger]

SilverRanger,

Are you pair trading HK stocks? I looked into them and they backtest well, but at ~0.2 - 0.25% commission it seems almost impossible to pair trade. ~1% per pair trade(round trip) commission costs would put me out of the picture. What is your expectancy on the HK markets? or are you getting a good commission somewhere?

Ed.

Unfortunately I don't have access to cheaper commission rate for HK stocks, but I think the pair variety and potential returns more than offset the cost.

In March & April I'm averaging 2% per trade, so still positive after commission, traded pairs include financials, properties (HK or mainland), retail, utilities, export, aviation.... Plenty of opportunities everyday!

 

[VSntchr]

When signals are set off because of massive drops, eg. FWD and FGE today setting off (FWD/WOR) and (FGE/MIN), are you guys avoiding such trades?

 

[skc]

When signals are set off because of massive drops, eg. FWD and FGE today setting off (FWD/WOR) and (FGE/MIN), are you guys avoiding such trades?

Yes. It usually takes quite a few days/weeks for the price action of a massive drop to settle down. There's often a bounce, but you are just chancing it rather than having any real quantitative edge.

If you have a view that particular stock is oversold / undervalued than just trade that view.

Having said that, the sector is simply looking for the next downgrade - so a longer term pair where you long an already downgraded stock and short yet-to-downgrade stock, may pay off. But that will have a very different risk profile to the usual statistics based trade again.

 

[VSntchr]

Yes. It usually takes quite a few days/weeks for the price action of a massive drop to settle down. There's often a bounce, but you are just chancing it rather than having any real quantitative edge.

If you have a view that particular stock is oversold / undervalued than just trade that view.

Having said that, the sector is simply looking for the next downgrade - so a longer term pair where you long an already downgraded stock and short yet-to-downgrade stock, may pay off. But that will have a very different risk profile to the usual statistics based trade again.

Thanks for confirming.

Have just started kicking things into gear this week (not real money yet), looking forward to posting some trades as I get going.

 

[VSntchr]

Ive decided my account size and based on the fact that at any one time I may have 10+ trades open I realise that going long and short stock is going to be to capital demanding.

Ive read through the thread and have seen mention of margin requirements but I am assuming its through the use of CFD's rather than simply 'margin' which only offers ~2x...

Just wondering what the best way is to get started with CFDs? I know of IGmarkets and CMCmarkets...but have no idea how the process works with regard to accounts and trading...do they just provide the CFD products and then I use IB to place trades? or do they provide the whole kit-n-kaboodle? I plan to spend a few days sussing out both the sites but if anyone could give me a headstart that would be great..

 

[skc]

Ive decided my account size and based on the fact that at any one time I may have 10+ trades open I realise that going long and short stock is going to be to capital demanding.

Ive read through the thread and have seen mention of margin requirements but I am assuming its through the use of CFD's rather than simply 'margin' which only offers ~2x...

Just wondering what the best way is to get started with CFDs? I know of IGmarkets and CMCmarkets...but have no idea how the process works with regard to accounts and trading...do they just provide the CFD products and then I use IB to place trades? or do they provide the whole kit-n-kaboodle? I plan to spend a few days sussing out both the sites but if anyone could give me a headstart that would be great..

CFD provider is like a broker and you do everything on their platform. IG has a web-based platform that's simple albeit a bit slow. They also has a 2week demo that you can familiarise before placing real trades.

Read up on the difference between DMA and Market-maker CFDs.

Also make sure you position size probably.

 

[VSntchr]

CFD provider is like a broker and you do everything on their platform. IG has a web-based platform that's simple albeit a bit slow. They also has a 2week demo that you can familiarise before placing real trades.

Read up on the difference between DMA and Market-maker CFDs.

Also make sure you position size probably.

Thank you again kind sir. My debt to you grows larger by the day

 

[VSntchr]

This one popped up today:
Long WRT
Short WDC
My initial thoughts were that WDC has been holding up due to its international exposure which investors are obviously favouring with the skippy losing value lately...thus my conclusion is that the divergence is news based/fundamental and have left the trade alone.

Same reasoning for Long CFX, Short WDC/CQR which both triggered today too...

 

[VSntchr]

Have spent the last week playing with parameters and backtesting in order to gain a deeper understanding of which settings will affect certain outputs - and in what magnitude, and what settings are relevant to my strategy.

Has been intensive and I am super tired having spent many hours doing this whilst still working full time among other things - but its also been fun and I have learnt ALOT!

Have been paper trading some pairs based on the trigger signals and my own discretion filters. So far doing nicely, but the number of trades is not signficant.

Once I get going I plan to post most trades in here (rather than a new thread), so people can follow the journey/critique/join in and post their own.

 

[CanOz]

Is there any reason you guys don't trade US stocks? There must be a pile of pair trading opportunities in the massive US equity markets?

CanOz

 

[skc]

Is there any reason you guys don't trade US stocks? There must be a pile of pair trading opportunities in the massive US equity markets?

CanOz

3 reasons:

1. You got to know your stocks well. When are they reporting, what the analysts are saying, how $AUD will affect them etc etc. The massive US equities market means massive amount of knowledge needed. Sure there are people out there who pairs trade the statistics alone... but I filter my trades with heaps of discretion and fundamentals knowledge, which would take years to gain in a new market.

2. You need to be in front of the screen all day to manage your trades in terms of entries/exits as well as any unexpected news etc. The time difference makes it difficult for those based in Australia to manage their positions.

3. Anecdotally, I read that the margin on pairs trading is somewhat thinner over the US - possibly due to the fact that there are more bots running arbs or something like that.

So it's certainly possible but not something I am contemplating at this moment.

This one popped up today:
Long WRT
Short WDC
My initial thoughts were that WDC has been holding up due to its international exposure which investors are obviously favouring with the skippy losing value lately...thus my conclusion is that the divergence is news based/fundamental and have left the trade alone.

Same reasoning for Long CFX, Short WDC/CQR which both triggered today too...

Yes. Very good discipline being shown here. Plus the fact that WDC had AGM coming up on 28 May which was probably within the hold period of the pair. So it was a trade that I avoided as well.

 

[CanOz]

3 reasons:

1. You got to know your stocks well. When are they reporting, what the analysts are saying, how $AUD will affect them etc etc. The massive US equities market means massive amount of knowledge needed. Sure there are people out there who pairs trade the statistics alone... but I filter my trades with heaps of discretion and fundamentals knowledge, which would take years to gain in a new market.

2. You need to be in front of the screen all day to manage your trades in terms of entries/exits as well as any unexpected news etc. The time difference makes it difficult for those based in Australia to manage their positions.

3. Anecdotally, I read that the margin on pairs trading is somewhat thinner over the US - possibly due to the fact that there are more bots running arbs or something like that.

Yes i can see, after reading the entire thread, that even with an intimate knowledge of the issues you can still suffer losses that wipe out all the prior work.

I've been researching statistical arbitrage a little over the last week and pairs trading looked like something that i could possibly consider as a strategy to trade.

As with any trading strategy there are many challenges and I agree with you that the trades are best watched closely so you can intervene quickly if necessary. So that leaves ASX stocks, LSE, and German stocks as an option for me due to time zones and trading times. Then you must have access to a supply of stocks to borrow and short. That means going through the list and comparing them to IBs short-able issues list, even then they may not have inventory. I cannot open a CFD account due to my residency. IB has CFDs but to my knowledge they are quite illiquid...will investigate UK CFDs through IB though.

News and research on the sectors and issues needs to be considered. One would need fast access to the history and news. TTN should be able to be configured for this, it does have a portfolio function as well.

Then there is the issue that many exchanges are already being "Arbed" by algorithms designed to do this systematically all day long.

I've actually downloaded two spread trading applications as a trial, one of them is Pair Trade Finder, and the other is an add on for NT that although an interesting consideration for stocks, is mostly suited to futures. Pair Trade Finder is extremely easy to use, very impressed with its capabilities and user interface...certainly one of the easiest to learn, trading software apps i have come across.

So it looks like there is still allot of research to left to do even before i can consider putting together a trading plan. Then it needs to be paper traded for a month or to become familiar with the research, software and executing the trades, recording the results. I'm particularly impressed with your trade analysis and statistics, I've not seen anything as thorough in my 8 years of trading, seriously outstanding work.:bowdown:

This type of strategy sort of suits my desire to step away from intra-day trading as its more closely related to a 2-10 day swing trade, entered intra-day. I still have the time to be at my desk, but just not wanting to stare into a DOM all day.

I have enormous amounts of respect for your hard work, discipline and tenacity SKC. What you've done here should not be underestimated. I hope your Stat Arb opportunities continue to provide you with the income and lifestyle that we all strive for. Well done...!:thankyou:

CanOz

 

[skc]

I have enormous amounts of respect for your hard work, discipline and tenacity SKC. What you've done here should not be underestimated. I hope your Stat Arb opportunities continue to provide you with the income and lifestyle that we all strive for. Well done...!

Thanks for the kind words, CanOz.

With IB you can add a column called "Shortable" which shows you if something is, well, "shortable". This is easier than looking up a list all the time. But IB may not give you enough leverage to hold all the pairs. If you trade an account and size your positions at 15% of capital per trade, you can probably only hold 5-6 pairs. Probably enough for a start but you will want more down the track.

Not that I am trying to talk you out of pairs trading... but your 3 month trial of day trading futures is simply not long enough. I've had periods of drawdown longer than that trading pairs - and that's after I've been trading it for 3 years.

Anyhow, good luck with the research and feel free to ask any questions here.

 

[CanOz]

Thanks for the kind words, CanOz.

With IB you can add a column called "Shortable" which shows you if something is, well, "shortable". This is easier than looking up a list all the time. But IB may not give you enough leverage to hold all the pairs. If you trade an account and size your positions at 15% of capital per trade, you can probably only hold 5-6 pairs. Probably enough for a start but you will want more down the track.

Not that I am trying to talk you out of pairs trading... but your 3 month trial of day trading futures is simply not long enough. I've had periods of drawdown longer than that trading pairs - and that's after I've been trading it for 3 years.

Anyhow, good luck with the research and feel free to ask any questions here.

Yeah, i know that's true...i was tired and frustrated, a few family issues and just needed a break. Its a good thing actually because since the day after i threw in the towel i have had more connectivity issues and have resorted to using IB for Gold and Crude, which i continue to watch through the day. I don't think I'll try the intra-day trading live again until i can get a leased line. There's a guy moving here from overseas soon, he's a Prop trader and setting up an office nearby. I may be able to rent the office with him, learn a few things and have a decent connection.

I'm still paper trading a few ideas on EOD futures. Trading a few patterns on US Stocks, even considering trading one of Nick's new systems.

We've got the summer doldrums coming up and I'll be traveling anyway, so time to think and reflect, plan and come back full swing in the Autumn (err your Spring).

In the meantime I'm going to study for my CMT designation, so lots to keep me busy. Maybe Pairs trading would be too busy!

Cheers,



CanOz

 

[Huskar]

Have spent the last week playing with parameters and backtesting in order to gain a deeper understanding of which settings will affect certain outputs - and in what magnitude, and what settings are relevant to my strategy.

Has been intensive and I am super tired having spent many hours doing this whilst still working full time among other things - but its also been fun and I have learnt ALOT!

Have been paper trading some pairs based on the trigger signals and my own discretion filters. So far doing nicely, but the number of trades is not signficant.

Once I get going I plan to post most trades in here (rather than a new thread), so people can follow the journey/critique/join in and post their own.

Great to hear VS I will watch with interest.

I started trying to take the journey myself but the day job got in the way...

All the best!

 

[VSntchr]

Great to hear VS I will watch with interest.

I started trying to take the journey myself but the day job got in the way...

All the best!

Cheers.
I can definitely see the issue with the day job, I'm taking it easy at first to try and figure out the logistics of my situation and what I can handle.


Starting today, woohoo!
#1 LONG PMV $6.84
SHORT PBG $0.75
Leg Size 20%, which is high...but I have only started with a small balance to test. If I had increased balance to full account this would have been 10%.

Horrible trade execution - but being the first trade I'm not going to punish myself too harshly just yet. Had another trade (diff strategy) to try and manage on the open aswell which left me a tad stretched.

 

[VSntchr]

Cheers.
I can definitely see the issue with the day job, I'm taking it easy at first to try and figure out the logistics of my situation and what I can handle.


Starting today, woohoo!
#1 LONG PMV $6.84
SHORT PBG $0.75

#1 CLOSED
SOLD PMV $6.85 (0.14% profit)
COVERED PBG $0.71 (5.3% profit)
Commision: 0.10%

Happy to take a good profit after only 1 day.
Perhaps BBG's ann. helped drag PBG down which has been a bit more resilient than the other retailers of late. Had I executed the trade better I could have achieved ~3% more...

 

[skc]

#1 CLOSED
SOLD PMV $6.85 (0.14% profit)
COVERED PBG $0.71 (5.3% profit)
Commision: 0.10%

Happy to take a good profit after only 1 day.
Perhaps BBG's ann. helped drag PBG down which has been a bit more resilient than the other retailers of late. Had I executed the trade better I could have achieved ~3% more...

Great stuff.