Pairs Trading UK & US Stocks Journal

well for there to be an opportunity in the first place the correlation , by definition, has to have fallen away over a short time frame - surely?

UTB

UTB:

Does your statement implicate that you are betting the correlation trend will reverse whereas if you select a pair with rising correlation you are betting that the trend will continue? Maybe I am placing too much emphasis on correlation.

I am trying to learn what makes a good pair but haven't accomplished that yet.

Lado

it depends what timeframe's you're looking at. Over the "shortest" timeframe one of the pair must have risen against its' mean, and the other fallen, for a trade to be signalled. This is negative correlation. So discussions about correlations must be timeframe dependant.

UTB

I wouldn't worry too much about correlation, so long as its high and both stocks are in the same industry thats good enough for me, yes increasing correlation is a plus, I know the guys at ET preach it, but its not a strict mandate imo.

Closed one trade

Sold UA - 13.77

Covered BEBE - 4.87

Opened trade in US Oil & Gas Drilling Industry

Long Entry ME - 7.40

Short Entry NTG - 15.04

Took trade in US Life Insurance Industry

Long Entry MET - 13.72

Short Entry TMK - 18.08

New trade in US REIT Retail Industry

Long Entry SPG - 29.36

Short Entry TCO - 15.60

Presumably PairTradeFinder tells you when the ratio between the pair you are trading has moved sufficiently close together again and it is time to take your profits. Does it also give a signal if the pair keep on diverging and it is time to cut your losses ? And if so, on what basis is that signal given - correlation falling below a particular threshold, perhaps ?

Also, what is your win / loss ratio ? Do you have a rough idea of what that ratio would be if you didn't apply any discretion but followed all the signals blindly ?

Yes it will trigger an exit signal when the pair comes back to its mean, it doesn't use a stop loss, because a rolling mean is used instead of a static mean it will simply exit once the pair comes back, profit or loss.

About 70% of my trades are profitable, not sure what the ratio would be if I didn't apply filters, it may be the same but the trades I take would have a lower risk profile.

Closed a trade

Sold PDC - 3.90

Covered RDC - 11.32

New trade

Long Entry ACE - 31.87

Short Entry CB - 35.24