pairs strategy

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complete novice

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Hello folks, as my title suggests i am a rank novice doing the work required to get some ideas of whether trading and earning a little cash is for me. Looking into the CFD trading strategy I like the thought of pairing as it reduces (hopefully) the prospect of heavy losses. I was then wondering, (and if this has already been addressed please direct me to the thread) in a similar way to pairing, is it possible to have an account with 2 different brokers (or even 2 separate accounts with the same broker) and simultaneously place 2 orders, one going long, the other going short on the same stock/index/whatever and then close the order that is causing the losses?

Any thoughts, I'm sure other people must have considered this, and if it has been tried, has it been found to be effective. As a complete novice who has never placed an order yet please forgive me if this appears to be a stupid question, it is raised in genuine concern and a desire to be fully informed before throwing my money away.

Also if anyone has any good suggestions or couples regarding pairs trading please let me know of them
many many thanks, love the site

mark b
 
complete novice said:
Hello folks, as my title suggests i am a rank novice doing the work required to get some ideas of whether trading and earning a little cash is for me. Looking into the CFD trading strategy I like the thought of pairing as it reduces (hopefully) the prospect of heavy losses. I was then wondering, (and if this has already been addressed please direct me to the thread) in a similar way to pairing, is it possible to have an account with 2 different brokers (or even 2 separate accounts with the same broker) and simultaneously place 2 orders, one going long, the other going short on the same stock/index/whatever and then close the order that is causing the losses?

Any thoughts, I'm sure other people must have considered this, and if it has been tried, has it been found to be effective. As a complete novice who has never placed an order yet please forgive me if this appears to be a stupid question, it is raised in genuine concern and a desire to be fully informed before throwing my money away.

Also if anyone has any good suggestions or couples regarding pairs trading please let me know of them
many many thanks, love the site

mark b
Click to expand...

Hi Mark, yeah this topic of pairs trading raises it's head quite often and it always touches on the idea that being long and short the same instrument is somehow desirable. In fact, all this does is incur 2 x the spread for no overall gain whatsoever.

A better way to think about it would be to pair up similar movers, correlated to some acceptable degree. The point is, that you need an element of difference in order that at some point in time, you can close both a winner and maybe a loser for a nett overall gain. Also it is possible to bias your stake until such time as you finish with an overall profit. Job done, start the process again. The best use of your time would be spent in pairs matching and of difference identification, then just get on and trade them.
 
The only question deemed as silly would be the one that is not asked....

Most people in these forums are here to glean information and to enhance the knowledge they have.. you are not alone.
 
biggercapital.squarespace.com/spread-analyzer/

A good tool for looking at whether statistically you're looking at a mean reverting pair (based on time frame selected).

If you're basing your pairs on the view of one stock out performing another or sector relative to index, then this tool might not be so helpful.
 
Hi Complete Novice,
I was advised by a broker to hold a long and short CFD in the same stock and it turned out to be a big mistake for me and the only person making any money was the broker, as the losses on one position wipes out the gains on the other although the broker will tell you that they will get you out of each position at the right time, in my experience this never happens!
Also bear in mind that if the stock is a dividend payer and you go in at the wrong time you can as happened to me end up having to pay the dividend on the short position,which wipes out the divi on the long and you also have to pay the interest in both positions in the CFD!
Please forget this idea or get further advice from independent FSA
 
counter_violent said:
Hi Mark, yeah this topic of pairs trading raises it's head quite often and it always touches on the idea that being long and short the same instrument is somehow desirable. In fact, all this does is incur 2 x the spread for no overall gain whatsoever.
Click to expand...

(y)
 
Dear Leopard,
you have confirmed what I suspected for some time and yet my broker persuaded me at one stage to have £22,000 in both long and short positions of the same stock and they also did the same with a £25,000 position in the ftsee 100. I queried this with the broker and it was explained to me that it was like an insurance policy, I could never see the logic in this strategy and still cant except that it earns more commission for brokers!
 
strokey tone said:
Dear Leopard,
you have confirmed what I suspected for some time and yet my broker persuaded me at one stage to have £22,000 in both long and short positions of the same stock and they also did the same with a £25,000 position in the ftsee 100. I queried this with the broker and it was explained to me that it was like an insurance policy, I could never see the logic in this strategy and still cant except that it earns more commission for brokers!
Click to expand...

I'd be wary of that broker. :) If a broker told you that you might well have grounds for a complaint.

At the end of the day, you have your interests and he has his. He wants to generate commissions, which is fine - he's looking after his interests, and you have to look after yours.

But your query is perfectly correct. It is not an insurance at all, this is nonsense. Two equal positions simply cancel each other out. All you get is double the commissions.
 
If you are serious about pairs trading I would say stick to U.S. indices.
Different ES contracts for instance or YM/ER2/NQ futures contracts.

With anything else the correlation is most likely an illusion that will be broken sooner or later.
Even the above pairs can go offside enough to mean you can't maintain the margin.
It is a viable strategy, but don't kid yourself that its bulletproof - nothing is.
 
The Leopard said:
I'd be wary of that broker. :) If a broker told you that you might well have grounds for a complaint.

At the end of the day, you have your interests and he has his. He wants to generate commissions, which is fine - he's looking after his interests, and you have to look after yours.

But your query is perfectly correct. It is not an insurance at all, this is nonsense. Two equal positions simply cancel each other out. All you get is double the commissions.
Click to expand...

I think the guy who posted earlier on didnt explain very well. he must have been long and the broker told him to hedge the other side, that would make more sense. But yea the broker has his own interests in mind when he tells ppl to do that
 
rookie, the broker told you to hedge and you are hacked off because it didnt make you a profit. Look up the definition of a hedge. If you asked him for a suitable pairs trade idea then thats different
 
Dear Rookie,
I would never have a long and short position open in the same stock at the same time , as I said before, all it does in my experience is earn more commission for the broker and if it's in CFD positions then it will cost you interest as well !
If the broker I was with was so good he would have been taking the risk with his own money and taking profits, instead he was calling me several times a day to get me to take the risk because he knew he would get his fee for sure even if the deal went down the pan which it usually did!
There is a post on this site by Toonbarmy and he applies for a job as a trainee trader (Looking to hire) with a company that want him to cold sell this sort of trading to new clients and he quite rightly questions this practice,
Good for him!
 
O i see what you mean. Yea it sounds like you are spreading CFDs, the broker is actually the market maker and he is advising you to hedge so he doesnt have to do himself and he earns double. I would try not to spread CFDs btw, better DMA, that way it takes away some of the COI and you can see the individual buy and sell orders. more transparency

anyway an example of a pairs strategy would be to look at the RSI between e.g. two mining stocks and buy and sell them respectively when they reach simultaneous "overbought" and "oversold" (however you define it) conditions. can be dodgy sometimes, remember stopping when m&a picked up

TBH i rarely speak to (retail) brokers because im lucky enough not to need their ****ty advice
 
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