Can anybody tell me if there are any sites/advisory services/books on the best way to select/trade pairs of stocks one long and short taking profits when the difference between the two widens. (one long one short)
I currently use TC200 end of day software and am looking to trade pairs of US stocks or different indexes if I can find a good method. I note indexking posted some pairs trades on here for a while but seems to have disappeared to Spain!
In my view the best way to do this is to select a strong stock in strong sector and buy it and at the same time short a weak stock in a weak sector and it really is that simple. A good time to check for this would be around 6.50pm and I think that TC2000 should do this for you. Of course there is always the risk that both will reverse but that is trading for you. Generally though I have found that if you do this for a number of stocks and basket trade them overall it was profitable although I have never tried it in realtime.
You make one single bet. As of tonight the spread with IG for example is FTSE/DAX 774-784 and FTSE/DOW 5078-5100.so with FTSE at approx 4200 and DOW 9300 diff is 5100.If you expect this diff to move closer you'd sell at 5078,or buy at 5100 if you expect the DOW to outperform
Thanks for the advice I am with Deal4Free I don't think they do the differential bet.How difficult is it to find a system to make profits pair trading it seems safer to me than trading just the one index so in theory you should be able to use higher stakes and close for a smaller point gain than you normally would seek?
Just wanted to let you know that I offer a free proprietary Pair Trading Tool that anyone can use. It was developed in Excel and converted to be available on the web. I think this is a tool that could be extremely helpful.
Stake size should be governed by the beta between the two indices. You can then slide this into your spread calculation Z = Y - βX where Z is the spread and β is the beta between the two symbols Y and X.
The choice of beta calculation (fixed vs adaptive) generally depends on the volatility between the pair components.