ASX Stock Pairs Trade Journal

[Vixs]

VS are you happy with executing your trade ideas with CFDs?

Any issues you are encountering that you don't think you would be if you were trading larger positions directly?

Any advantages? (Besides the comm. being pretty damn reasonable imo)

 

[VSntchr]

VS are you happy with executing your trade ideas with CFDs?

Any issues you are encountering that you don't think you would be if you were trading larger positions directly?

Any advantages? (Besides the comm. being pretty damn reasonable imo)

Advantages are pretty obvious in the increased position sizes for your available capital and cheaper brokerage than the major Aussie brokers..although you could use IB and get it 0.02% cheaper..which would add up over time.

Disadvantages are that I cant use DMA on my android phone, other than that I havent really come by any other issues.

 

[skc]

New trade:
Long SIP @ 0.755
Short RMD @ 5.12

These aren't perfectly fundamentally correlated so SKC might avoid such a trade, but statistically they show ~80% correlation. I have taken a small leg size of 6% and felt I got a pretty good entry so am happy to see how this one goes. I think SIP is not bad as a longer term story and the share buy-back seems to be providing decent support longer term also...

You are right. Not a pair on my list and probably not a trade I'd take in this market.

SIP/API used to be the perfect pair but API is getting a bit too thin these days.

 

[VSntchr]

Actually made a profitable ALZ/CPA trade yesterday - but as I didnt get on here to post I won't bother logging it after time.
Currently have 2 open positions, both showing signficant losses
AIO/TOL and SIP/RMD

 

[skc]

Actually made a profitable ALZ/CPA trade yesterday - but as I didnt get on here to post I won't bother logging it after time.
Currently have 2 open positions, both showing signficant losses
AIO/TOL and SIP/RMD

I was going to tell you that AIO had a scheduled analyst site visit and there was always a chance that they'd provide a market update which could go either way.

Luckily for you the update simply re-affirmed profit expectations.

Now enjoy the mean reversion.

 

[VSntchr]

I was going to tell you that AIO had a scheduled analyst site visit and there was always a chance that they'd provide a market update which could go either way.

Luckily for you the update simply re-affirmed profit expectations.

Now enjoy the mean reversion.

I am a lucky boy indeed.
I am out at AIO - $4.81 (1.35% profit) and TOL $5.16 (3.18% loss) after commision.
Probably should have let it run its course over the next few days...but was happy to get out of the big loss. That reflects my inexperience but we'll see what happens.

I really need to get a good news feed setup and some better access to analyst info etc. Thats my next step.

 

[skc]

TOL got upgraded by Credit Swiss today so a pretty decent jump. I still think it's a good earning downgrade candidate. The AIO/TOL trade only widened by 1.5% today which is actually much better than some of my other trades...

Well... TOL had a trading update with EBIT re-affirmed and seems to be quite well received...

 

[Boggo]

Well... TOL had a trading update with EBIT re-affirmed and seems to be quite well received...

Seems like it was well received over a week ago skc .
https://www.aussiestockforums.com/f...t=1616&page=12&p=780739&viewfull=1#post780739

 

[VSntchr]

Long CDI short ALZ is currently burning me HARD!

Had a few other good trades the past week and am doing okay on LONG BPT SHORT DLS...

 

[skc]

Long CDI short ALZ is currently burning me HARD!

Had a few other good trades the past week and am doing okay on LONG BPT SHORT DLS...

Make of it what you will. It's not the first time this rumour's been around.

Beach Energy’s: move to beef up its already bulging balance sheet has caught the attention of some investors who could see the oil and gas player making a move on smaller rivals Drillsearch or Senex Energy. The $1.4 billion Beach is topping up a $150 million debt facility through ANZ and CBA, increasing the loan to $320 million on three- and five-year terms. It comes as the company already had $343 million cash on its balance sheet at December 31 and received another $US190 million cash upfront from a deal with Chevron in February, reports The Australian Financial Review.

 

[VSntchr]

Make of it what you will. It's not the first time this rumour's been around.

THanks for the info, however I got out about 10 minutes ago for decent profit so no need for me to interpret (for this trade at least : ).

BPT 1.135 sold 1.18
DLS 1.05 covered 1.045

Only a 6% leg size however :bad:

 

[skc]

Only a 6% leg size however :bad:

That sounds about right for this pair

 

[coolcup]

Long CDI short ALZ is currently burning me HARD!

Had a few other good trades the past week and am doing okay on LONG BPT SHORT DLS...

What was the thinking behind this? ALZ is driven more by resi sentiment (corporate activity is just noise since GPT walked away) whereas CDI is simply an owner / manager of income producing assets?

 

[VSntchr]

What was the thinking behind this? ALZ is driven more by resi sentiment (corporate activity is just noise since GPT walked away) whereas CDI is simply an owner / manager of income producing assets?

Yes but those income producing assets are property nonetheless... I see your point in that the fundamental correlation isn't perfect - but my intention isn't to find perfect fundamental correlations, rather just strong ones.

Statistical correlation at the time of trade was ~70%.
Only 4 days old so plenty of time to let it mean revert...we'l see what the rest of the week brings.

 

[coolcup]

Yes but those income producing assets are property nonetheless... I see your point in that the fundamental correlation isn't perfect - but my intention isn't to find perfect fundamental correlations, rather just strong ones.

Statistical correlation at the time of trade was ~70%.
Only 4 days old so plenty of time to let it mean revert...we'l see what the rest of the week brings.

Ok cool. I had not actually crunched any numbers on the correlation, I was just thinking business model wise - although ALZ and CDI both have similar investment portfolios (office and industrial properties), ALZ's price is generally much more driven by sentiment towards residential (which CDI does not have exposure to).

Both companies have large shareholders (>50%) which lower liquidity so perhaps some of the correlation was due to their jagged trading patterns as a result of insufficient liquidity? Hope it turns around for you all the same!

 

[ginger27]

Has anyone had any luck contacting support at PTF? I tried via the website and by email with no luck. Thx in advance.

 

[havaiana]

Just wanted to delve a little bit deeper into this post from this thread https://www.aussiestockforums.com/forums/showthread.php?t=27234&p=789085&viewfull=1#post789085

A mean reversion strategy on outright share may be completely valid, but you wouldn't trigger it based on divergence away from the mean of a pair's ratio. If you are simply looking at divergence from mean with the stock itself - then really that's just trading off Bollingar bands or moving average etc. Otherwise you can trade a stock divergence from a sector's mean. But without hedging the resulting equity curve would be very different I'd imagine.

On odd occasions I do use signals from pairs trading to take outright trades, but the position sizing, stop placement etc will be completely different.

Anyway, if you have questions on equity pairs probably best to ask them on the pairs trading thread to keep it all together.

I don't know much about trading shares let alone pair trading them so I'm probably making a lot of wrong assumptions here.

I would assume that most of the pair trade divergence would usually be from one of the stocks diverging from the other rather than both diverging from each other?
I would also assume that the one that reverts back to the mean more is usually the one that has diverted most?
If not disregard rest of post!

So in theory if you just took that one side, obviously using relevant position sizing to outright trading, maybe the profits could be more than if you traded it as a pair. Because you would be targeting the more profitable side plus also improving significantly commission to profit ratio. I know this doesn't take into consideration the advantage of a smooth equity curve on compounded returns and there will still be more exposure oiutright regardless of reduction of position size, but I'm just thinking.

Reason I'm thinking about this is not because I think trading outright would be better but because using pair trading concepts could be a better way for outright traders to trade. For example the divergence of a pair would be a more relevant and less lagging indicator than using bollinger bands or a moving average for an outright trader.

I think most outright traders are usually watching the divergence of other markets when deciding whether or not to take a trade anyway, but the concepts used in pair trading could be a better way to do that or at least value-add to it rather than just eyeballing the other instruments.

 

[skc]

I would assume that most of the pair trade divergence would usually be from one of the stocks diverging from the other rather than both diverging from each other?
I would also assume that the one that reverts back to the mean more is usually the one that has diverted most?
If not disregard rest of post!

I like your thinking and I don't have a quantitative answer to your question. But I'd still maintain that the short answer is no - that taking outright position in the leg that has "diverted" will not be more profitable.

Divergence is a move away from something... in pairs you are looking at ratio of a pair. It is not the share price that has diverted, it is the ratio of the two prices that have diverted relative to their historical ratio. Take a pair A and B, a significant divergence may be a result of: 1). Stock A jumping 5% ;2). Stock B falling 5%; or 3). Stock A up 2.5% AND stock B down 2.5%.

You are saying that you'd just short stock A in the first situation. But in reality, the profit in case 1) could easily come from Stock B doing catch up and moving back up 5%. I don't know if there's any statistical significance (i.e. edge) to shorting Stock A whenever it jumps 5%, but pairs trading tells me that there IS an edge shorting the ratio of A/B when it diverges from the mean. If you want to trade outright, you need to establish that directional edge of shorting A... and that edge may or may not actually exist.

Every now and again you may find a situation where one stock in a sector has vastly outperformed relatively to all other stocks in the sector. So stock A is up 5% while stock B, C, D, E, F and G have all been flat. In this case it is less likely for the whole sector playing catchup to this one stock. But I'd say, if you see such a scenario, chances are there's something more fundamental driving the share price of that one outlier stock that you may be unaware of. Again, it may be an edge that you can explore and verify, but it is not an edge that comes from the pairs trading strategy itself.

One of the key benefits of pairs trading is that one can rely on the statistical edge and the market neutrality to put on larger positions and essentially pretty wide stops. That's what produces the high win% albeit with the occasional large $ loss. If you are trading outright the "diverted" stock, where do you place your stop? You really have to pick the bottom or top when you put in a tight stop (and you'd get stop out more often than not), or you left yourself exposed to market delta with a wide stop. This will of course flow on to position sizing and absolute $ profits (BTW, where do you take profit?). So I would think that, even if raw statistics show that shorting A whenever it jumps 5% may have say a 2% edge (over what timeframe?) while pairing A with B has only 1.5% edge (with a clear take profit target at mean reversion), the absolute profit from putting on the pair will probably be much higher than just shorting A.

So in summary, without a clearly defined edge and trading system parameters (sizing and exit strategy etc), I certainly can't conclude that outright mean reversion trading in equities will produce a better outcome than hedged pairs.

 

[havaiana]

Understood, thanks for the detailed answer

 

[edman79]

I would assume that most of the pair trade divergence would usually be from one of the stocks diverging from the other rather than both diverging from each other?
I would also assume that the one that reverts back to the mean more is usually the one that has diverted most?

I have wondered the same thing.
There are a variety of other factors to consider. Stocks don't fall at the same rate as they rise so you have to consider if it is the short side or the long side you are taking.

It will generally be the stock with the higher beta that moves the most. Does that mean that you will only trade the high beta stocks? For arguments sake, lets say you paired FMG vs RIO. You would be taking the FMG side most of the time and Id imagine your stop would be hit fairly often.

I tried to take note of the "Primary Mover" at one point but found if it is a good pair it makes little difference which side moved first.

When I run a check of my last years results I found although I have profited overall from both sides it seems like the long side of the trade has been much more profitable. Even when I check the stats since march where the market has moved sideways the long side seems to have doubled the short side in profits. Maybe there is something to be checked there?