ASX Stock Pairs Trade Journal

[skc]

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?

Since Aug last year, the long leg was responsible for >90% of the total profits. That's understandable considering the overall market is up ~20% since that time.

What I don't know is whether the profit from those longs was due to the long leg diverging (i.e. falling) or the long leg playing catch up to the short leg that has spiked. If it's the first case then outright long may have been quite profitable, but if it's the second case, you'd be shorting the spike and generate very little profit.

Understood, thanks for the detailed answer

Remember my answer is far from definitive as I don't have the data to back up what I've said. Yet that's exactly how a trader needs to evolve and develop new strategies and approaches - by looking at the market with a curious mind, identifying potential edges and verifying them.

 

[kefa]

hi all,

i'm curious to know what brokers people are using for pairs trading aussie stocks?

currently interactive brokers are not offering margin accounts so for the time being i can't use them. in any case it would be good to have a back up and the list of shortable stocks on IB whilst good is not extensive. i guess the only other choice is going with a cfd broker. i was having a look at fp markets which interesting charge 8bps and no minimum amount per trade if you have at least $50k deposited with them. anybody using them or can recommend another cfd broker?

 

[SilverRanger]

hi all,

i'm curious to know what brokers people are using for pairs trading aussie stocks?

currently interactive brokers are not offering margin accounts so for the time being i can't use them. in any case it would be good to have a back up and the list of shortable stocks on IB whilst good is not extensive. i guess the only other choice is going with a cfd broker. i was having a look at fp markets which interesting charge 8bps and no minimum amount per trade if you have at least $50k deposited with them. anybody using them or can recommend another cfd broker?

I'm using FP Markets atm, pretty good platform (Iress) and 8 bps are the positives, but they recently stopped paying interest on shorts and started charging stock borrowing fees, so I'm planning to switch.

Oh, and one more annoying thing with them is that you must close your current position before entering the reverse trade, this happens quite often to me and it's just extra effort for nothing, and worse still, you can't do that in market close!

 

[kefa]

I'm using FP Markets atm, pretty good platform (Iress) and 8 bps are the positives, but they recently stopped paying interest on shorts and started charging stock borrowing fees, so I'm planning to switch.

Double whammy thats got to suck. Who are you planning on switching to?

Oh, and one more annoying thing with them is that you must close your current position before entering the reverse trade, this happens quite often to me and it's just extra effort for nothing, and worse still, you can't do that in market close!

Do you mean you can't have both open buy and sell orders on the same stock?

 

[SilverRanger]

Double whammy thats got to suck. Who are you planning on switching to?

Currently looking at IG Markets and Saxo Capital Markets, I've been with IG previously and will give Saxo a try before settling on one.

Do you mean you can't have both open buy and sell orders on the same stock?

It means being net long 500 shares before and getting to net short 500 shares by putting a 1000 share sell order. Sometimes the exit of a pair trade was so good that it warrants going for the reverse trade. FP doesn't allow that.

 

[skc]

Currently looking at IG Markets and Saxo Capital Markets, I've been with IG previously and will give Saxo a try before settling on one.

I think IG is charging borrow cost these days as well. They also don't pay interest on funds.

It means being net long 500 shares before and getting to net short 500 shares by putting a 1000 share sell order. Sometimes the exit of a pair trade was so good that it warrants going for the reverse trade. FP doesn't allow that.

In this case wouldn't you need to sell 500 and separately short sell 500. May be it's due to short sell reporting requirement?

What about the other way? If you are holding 500 shares short, can you long 1000 to reverse?

 

[SilverRanger]

I think IG is charging borrow cost these days as well. They also don't pay interest on funds.

That's interesting to know, does the borrowing fee apply to all stocks or specific ones?

In this case wouldn't you need to sell 500 and separately short sell 500. May be it's due to short sell reporting requirement?

Yes that's what I would need to do, but it wouldn't be possible during market close (I can only put the first trade on, not the second), and definitely not as nice as just 1 trade.

What about the other way? If you are holding 500 shares short, can you long 1000 to reverse?

Good question, I actually don't know since I always open the short leg first. But from memory I never had issues reversing both long and short trades with IG and Saxo said that can be done under their platform.

 

[kefa]

they recently stopped paying interest on shorts

is this something they have changed explicitly? or have they stopped paying interest because the rba cash rate is so low now? according to the PDS they pay you cash rate - some offset, so if the cash rate is low enough and the offset is high enough you can end up paying them interest to short. but in theory it doesn't matter for pairs trading since you have both a long and short position you should always be paying 2 x offset for funding.

 

[skc]

That's interesting to know, does the borrowing fee apply to all stocks or specific ones?

Looks like just specific ones.

BORROWING CHARGES

If we incur a borrowing charge for opening a hedging position against your short share CFD position, this charge will be passed on to you (with a 0.5% admin fee).

To determine whether a borrowing charge applies, call our dealers in advance of trading. The borrowing charge (if applicable) will be accounted for in the daily interest adjustment that is applied to your trade. The borrowing charge, and the ability to go short, can be changed at short notice.

http://www.igmarkets.com.au/cfd/guaranteed-prices.html

 

[spec]

Hi All,

I came across an interesting article:
http://blogs.wsj.com/moneybeat/2013...t-correlations-plummet-stock-pickers-rejoice/

it said that correlation is decreasing and the current market is a stock pickers' market (based on fundamentals rather than technicals). Does this imply that fundamentals now play a more important role in pairs trading than before ? is Jared and Johnny Sharp's style of trading (based more on statistics) still working ? any thoughts ?

 

[skc]

Hi All,

I came across an interesting article:
http://blogs.wsj.com/moneybeat/2013...t-correlations-plummet-stock-pickers-rejoice/

it said that correlation is decreasing and the current market is a stock pickers' market (based on fundamentals rather than technicals). Does this imply that fundamentals now play a more important role in pairs trading than before ? is Jared and Johnny Sharp's style of trading (based more on statistics) still working ? any thoughts ?

The article referred to cross-sector correlations, as opposed to inter-sector correlations. It is also unclear what time period they are referring to... Correlation daily or weekly?

I have found pairs to be working just fine (July was my best month yet), although I am not trading in August due to the ASX reporting season.

 

[SilverRanger]

The article referred to cross-sector correlations, as opposed to inter-sector correlations. It is also unclear what time period they are referring to... Correlation daily or weekly?

I have found pairs to be working just fine (July was my best month yet), although I am not trading in August due to the ASX reporting season.

Yes, July was awesome

 

[SilverRanger]

Just as an update, I've tried "flipping" the position from net short to net long in FP Markets and Saxo, FP didn't allow it but Saxo did, so I'm overall satisfied with Saxo. One more neat little thing with Saxo is that if I modify my queued order from 100 shares to 150 shares, it keeps the first 100 shares in the queue and adds another 50. I think most brokers will just withdraw the entire order and place a new one

 

[ThingyMajiggy]

Ok so I'll ask here instead of the other thread, can anyone tell me what's wrong with trading this strategy if I was to buy/sell the extremes of this spread as a mean-reversion system? I've never spread traded stocks so not sure of the pitfalls, if any.

I believe you guys are doing this discretionally?

 

[skc]

Ok so I'll ask here instead of the other thread, can anyone tell me what's wrong with trading this strategy if I was to buy/sell the extremes of this spread as a mean-reversion system? I've never spread traded stocks so not sure of the pitfalls, if any.

I believe you guys are doing this discretionally?

View attachment 54285

Sam, BHP/RIO is a decent pair sometimes... in fact the very first trade on this thread by the OP was a long RIO / short BHP example. Although he put it on shortly after the failed takeover and so probably a trade that I'd avoid.

The pitfalls of a BHP/RIO pair is as per usual with a stock pairs. Ratio can blow out on you and you need to have stops and exit strategy. You need to keep an eye on upcoming news and make sure known fundamental factors are not driving the divergence in the pair.

BTW can you explain what you are plotting on the 2nd chart? What's the vertical axis exactly and why are there such large abrupt spikes?

 

[ThingyMajiggy]

Sam, BHP/RIO is a decent pair sometimes... in fact the very first trade on this thread by the OP was a long RIO / short BHP example. Although he put it on shortly after the failed takeover and so probably a trade that I'd avoid.

The pitfalls of a BHP/RIO pair is as per usual with a stock pairs. Ratio can blow out on you and you need to have stops and exit strategy. You need to keep an eye on upcoming news and make sure known fundamental factors are not driving the divergence in the pair.

BTW can you explain what you are plotting on the 2nd chart? What's the vertical axis exactly and why are there such large abrupt spikes?

Mm interesting. I coded it all myself from scratch so the vertical axis is my mega-super secret spread formula I was just curious as to why this wouldn't work, selling/buying the spread at the extremes there, doesn't seem to go much passed 3 or -3 so if you used that as an entry point and hold until it mean reverts back to the middle, in the words of Jeremy Clarkson....what could possibly go wrong?

 

[skc]

Mm interesting. I coded it all myself from scratch so the vertical axis is my mega-super secret spread formula I was just curious as to why this wouldn't work, selling/buying the spread at the extremes there, doesn't seem to go much passed 3 or -3 so if you used that as an entry point and hold until it mean reverts back to the middle, in the words of Jeremy Clarkson....what could possibly go wrong?

Without knowing your secret spread indicator... I'd verify 3 things:

1. Make sure it is not an oscillator (by accident or otherwise).
2. Be able to explain why you are getting these massive verticle jumps in the indicator. These seem to happen 2-3 times a year yet as far as I know the BHP/RIO relationship is no where near as volatile.
3. Does it actually make money? You are not buying/selling the "indicator" values but the share prices, so plug in the prices and position size (whatever your rule that that is) and make sure it makes money. It can be a case that the indicator mean-reverts but your positions are in net loss.

 

[DJG]

Do we have a list of pair trading software?
I know PTF is used a lot in this thread but since we've discovered their customer support is about as useless as you know what, what other options are out there?

 

[VSntchr]

Do we have a list of pair trading software?
I know PTF is used a lot in this thread but since we've discovered their customer support is about as useless as you know what, what other options are out there?

I have been in talks with my partner about building something better than PTF. Ive got the requirements shes got the maths and IT. It would be a way off yet - but perhaps in the future.
Im unaware of anything else.


Back to Pairs as of last week after the reporting season break. Starting slow as Im busy lately but had 1 small profit and have another currently in decent profit now. Need some good trades to make up for a few poor directional trades over the last month (short IVC and CCL )

 

[DJG]

I have been in talks with my partner about building something better than PTF. Ive got the requirements shes got the maths and IT. It would be a way off yet - but perhaps in the future.
Im unaware of anything else.

There is definitely a serious hole in the market you can fill. Build a decent bit of software, stand good on customer support and you're already ahead.