Pairs Trading UK & US Stocks Journal

This is a discussion on Pairs Trading UK & US Stocks Journal within the Trading Journals forums, part of the Reception category; Originally Posted by Lado From what I have read on a similar thread at elitetrader.com, the experienced traders say that ...

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Old Mar 2, 2009, 9:20am   #73
 
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Quote:
Originally Posted by Lado View Post
From what I have read on a similar thread at elitetrader.com, the experienced traders say that correlation has to be trending upward for a pair to be worthy of consideration. For this most recent pair, correlation has peaked and is heading downward. May be others get it but I don't.

Lado
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?

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Old Mar 2, 2009, 10:03am   #74
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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
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Old Mar 2, 2009, 9:15pm   #75
 
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Originally Posted by Lado View Post
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.

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Old Mar 3, 2009, 3:48am   #76
 
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stocktrader77 started this thread 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
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Old Mar 4, 2009, 2:27am   #77
 
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stocktrader77 started this thread Took trade in US Life Insurance Industry

Long Entry MET - 13.72

Short Entry TMK - 18.08
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Old Mar 5, 2009, 4:40am   #78
 
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stocktrader77 started this thread New trade in US REIT Retail Industry

Long Entry SPG - 29.36

Short Entry TCO - 15.60
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Old Mar 5, 2009, 2:55pm   #79
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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 ?
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Old Mar 6, 2009, 12:33am   #80
 
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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
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