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; As I promised 2 weeks ago in the thread ''Trading UK shares for a living'' im going to start a ...

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Old Jan 29, 2009, 2:44pm   #1
 
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Pairs Trading UK & US Stocks Journal

As I promised 2 weeks ago in the thread ''Trading UK shares for a living'' im going to start a journal detailing my trades and show that it can be done. Ive been inspired by a similar trading journal on another forum with the trader doing very well and actually getting better results with the help of other members, so in the interest of creating something useful and informative im going to document my analysis and trades here, where I hope to improve aswell and maybe I can build a proven track record that I can later use. My style is pair trading UK & US stocks, I use a combination of brokers - Interactive Brokers & IG markets to execute my trades, use a pair trading program for buy and sell signals and I have strict money management guidelines. I mostly stick to a rules-based trading system but use a little discretion. Currently on my radar, I have 72 NYSE stock pairs & 44 LSE stock pairs that are highly correlated and from various industries. I will list all my entry & exit prices during the market day or after market close.
Wish me luck
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Old Jan 29, 2009, 3:33pm   #2
 
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stocktrader77 started this thread Trade entered; UK stock pair SMDR vs DGO, two oil & gas exploration & production companies, correlation is high at 91% and the ratio chart is almost at a 200 day high.

Long Entry SMDR - 106.00

Short Entry DGO - 159.50
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Old Jan 29, 2009, 10:09pm   #3
 
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That's absolutely brilliant Maybe I can use this as empirical evidence in my dissertation. I was intending to write about the long/short strategy. Good luck to you, I hope you bucket loads
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Old Jan 30, 2009, 12:41am   #4
 
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Originally Posted by mhp123 View Post
That's absolutely brilliant Maybe I can use this as empirical evidence in my dissertation. I was intending to write about the long/short strategy. Good luck to you, I hope you bucket loads
Thanks, yes by all means use this as evidence in your thesis. Are you a student? Maybe you can prove all those efficient market theory professor's their wrong!
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Old Jan 30, 2009, 1:33pm   #5
 
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lol, let's hope so. I'm studying Economics, final year.
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Old Jan 30, 2009, 2:57pm   #6
 
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stocktrader77 started this thread Just thought id post a quick explanation of pair trading to those of you who don't know what it is;

The pairs trade was developed in the late 1980s by quantitative analysts and pioneered by Gerald Bamberger while at Morgan Stanley. With the help of others at Morgan Stanley at the time, including Nunzio Tartaglia, Bamberger found that certain securities, often competitors in the same sector, were correlated in their day-to-day price movements. When the correlation broke down, i.e. one stock traded up while the other traded down, they would sell the outperforming stock and buy the underperforming one, betting that the "spread" between the two would eventually converge.

The pairs trade helps to hedge sector and market risk. For example, if the market as a whole crashes and your two stocks plummet along with it, you should experience a gain on the short position and a negating loss on the long position, leaving your profit close to zero in spite of the large move. In a pairs trade, you are not making a bet on the direction of the stocks in absolute terms, but on the direction of the stocks relative to each other.

Pairs trade - Wikipedia, the free encyclopedia
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Old Jan 31, 2009, 3:39am   #7
 
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stocktrader77 started this thread Entered a trade on the NYSE, two shipping companies Overseas Shipholding Group Inc. (OSG) & Teekay Tankers Ltd. (TNK). I can see the ratio chart approaching the support zone plus there is a divergence between the RSI & ratio chart and high correlation at 94.71%

Long Entry OSG - 35.76

Short Entry TNK - 11.81
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Old Feb 3, 2009, 4:14am   #8
 
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stocktrader77 started this thread Opened another US trade on Monday,

Long Entry UA - 16.79

Short Entry BEBE - 5.80

This pair is from the apparel clothing industry and currently showing a ratio/rsi divergence.
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Old Feb 3, 2009, 10:19am   #9
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Hi stocktrader77,
A potentially interesting thread!
A few questions if I may . . .
1. It looks as if your 'pair trade finder' software produces the pairs to trade and then you select suitable candidates from that shortlist - is this correct?
2. If - as you imply - the software produces buy and sell signals, could the whole process be automated, eradicating the need for any discretionary input?
3. I think you said you've around 70 U.S. pairs on your shortlist - how do you then decide which pair (or pairs plural) to trade? If you don't want to reveal too much about your own specific strategy, could you suggest the sorts of things that members who are following your thread might look for - i.e. what are the possible discretionary elements to the trade?
4. For most TA based traders here, timing the entry is very important. Once your selection is made, does timing play any part in the decision making process?
5. Given the hedging aspect of the trade, the risk is (theoretically) much reduced compared to a single directional trade. Do you increase the size of positions accordingly?
6. Following on from the above, do you close out the trade when the 'divergence' has been corrected and the pair are moving in tandem again?
I think that's enough for now!
Cheers,
Tim.
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Old Feb 3, 2009, 12:26pm   #10
 
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stocktrader77 started this thread Hi Tim, yeah you can use the backtester to find suitable pairs and then save them to your console. im sure it could be automated someway, not sure, you will have to email them. they advise to only trade pairs above 80% correlation and increasing with a non-trending ratio chart and rsi/ratio divergence, but not all these are strict filters, i like to keep a portfolio of different pairs from different industries, i mitigate risk through diversification and postion sizing. The only TA i use is looking for ratio/RSI divergences and making sure the ratio chart is in a trading range, then i just plain out take the entry and exit signals, the only discretion is in choosing what entry signals to take. yes you can use more leverage pair trading than directional trading. i also check the stock news on the day of an entry signal and see if earnings are about to be released, you don't want put on a position too close to earnings. so each day i have audio alerts set on and when i hear an entry signal, i look at the charts, if i like it, which is about 1 out of every 3 signals, i then place the trade and wait for a exit signal alert, rinse and repeat.
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