Pairs Trading

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shortrank

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Pairs Trading Strategy Model

I have been lately introduced to pairs trading. It sound like it is a great strategy to trade in an uncertain market in a trading range. I am looking for resources to learn more and develop my own strategy/model. Please help!

Thanks
 
There is a lot on this site about pairs trading all you need to do is conduct a search and plenty of infomation will be available.


Paul
 
In my view there is no need to use any of the above software because myself and others developed our own studies that we have used in Tradestation and Excel. If you look at early 2004 posts by Grey1 and myself you will see many live trades that we posted using pairs trading including charts and explanations of why the trade was taken etc.


Paul
 
Correlations

Thanks. Any chance of obtaining those studies.

Do they search for stocks with the best correlation?

Example below of what I am looking for
 

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Personally I didnt use Excel but Grey1 used a variation of it linked to a datafeed. I used Tradestation and yes it does give pairs that correlate well for trading. This is for intra-day trading only and for myself I use Radarscreen to alert me to possible opportunities.


Paul
 
watch for a while

shortrank said:
Pairs Trading Strategy Model

I have been lately introduced to pairs trading. It sound like it is a great strategy to trade in an uncertain market in a trading range. I am looking for resources to learn more and develop my own strategy/model. Please help!

Thanks
Click to expand...


With anything...if you just watch it and then give it the old 'college try' is how you should begin. If you have esignal, then type in two tickers and watch the chart just like you would with a single stock. The pair that I trade often is Marathon Oil and Valero (MRO - VLO). Just type in the first ticker symbol (the one you will be going long in) and add one space, a dash, then another space and add the second ticker symbol (the one you will be shorting). Pairs trading greatly reduces your risk and adds to the probability of success by giving you more ways to win. It's fun to do and I highly recommend you get more comfortable with pairs trading if you do any type of day-trading at all.
 
yeah

Trader333 said:
In my view there is no need to use any of the above software because myself and others developed our own studies that we have used in Tradestation and Excel. If you look at early 2004 posts by Grey1 and myself you will see many live trades that we posted using pairs trading including charts and explanations of why the trade was taken etc.


Paul
Click to expand...


I agree...there's no need to spend more money on software for something you could probably teach yourself just by monitoring and then trying at a small level. We learn more through experience than any other means. Start small then increase at personal, comfortable levels.
 
Also in agreement - no need to spend money for things that are FREE. There are a few good pair trade models on the web available for free, but they are not easy to find.

The best one I have found is from Catalyst Corner - http://catalystcorner.com/index.php?m=pair_tool - as it provides a pretty good graphical and statistical output of the pair.

Other than that, be weary of the $300+ software that is available... it's likely just someone who developed an Excel sheet and is charging a ridiculous amount for it.
 
Hi,

I'm also new to pair trading.

I've developed a system for pair trading on Nasdaq, the system is only for back testing, the trading is manual.

In back testing everything was fine, I got great results, about 80% success, 3% - 4% avg profit per pair during 4 - 6 days.

The only problem is that in the simulation I'm actually trading all of the pairs and in real life I need to choose only a few pairs. So I need to choose the better ones but it seems that the pairs that I choose are not so good. In reality I make 0$ gross.

I choose only high correlated pairs and I enter a position at 2 stdevs.

I use end of days data.

How do I choose the best pairs?

How do I know that a pair is not working.

Stop loss does not wok very well, the only stop that I use is time limit, that is I quit the pair after 14 days if I didn't reach my profit limit or if the price ratio did not hit the rolling price ratio average.

Thanks
 
ron_shelf said:
Hi,

I'm also new to pair trading.

I've developed a system for pair trading on Nasdaq, the system is only for back testing, the trading is manual.

In back testing everything was fine, I got great results, about 80% success, 3% - 4% avg profit per pair during 4 - 6 days.

The only problem is that in the simulation I'm actually trading all of the pairs and in real life I need to choose only a few pairs. So I need to choose the better ones but it seems that the pairs that I choose are not so good. In reality I make 0$ gross.

I choose only high correlated pairs and I enter a position at 2 stdevs.

I use end of days data.

How do I choose the best pairs?

How do I know that a pair is not working.

Stop loss does not wok very well, the only stop that I use is time limit, that is I quit the pair after 14 days if I didn't reach my profit limit or if the price ratio did not hit the rolling price ratio average.

Thanks
Click to expand...

I tested this out a year ago and hit the same problems as you, backtesting all pairs gave a nice return, but when you have to add your own manual strategy of picking the good pairs it fell a part, usually because I chose one or two bad large losers.

The pairs traders I've seen been successful don't blindly pick a pair based on the correlation technicals etc.., they look at the fundamentals and business of each stock. So a matter of knowing your stocks very well...
 
leonarda said:
I tested this out a year ago and hit the same problems as you, backtesting all pairs gave a nice return, but when you have to add your own manual strategy of picking the good pairs it fell a part, usually because I chose one or two bad large losers.

The pairs traders I've seen been successful don't blindly pick a pair based on the correlation technicals etc.., they look at the fundamentals and business of each stock. So a matter of knowing your stocks very well...
Click to expand...

Thank you,well that's bad news, this is exactly what I wanted to avoid.

By the way, can you do pairs trading intraday and make money?

I never backtested it, but if it takes me a few days to make a few % profit, then how much can I make on the same day?
 
ron_shelf said:
Thank you,well that's bad news, this is exactly what I wanted to avoid.

By the way, can you do pairs trading intraday and make money?

I never backtested it, but if it takes me a few days to make a few % profit, then how much can I make on the same day?
Click to expand...

I think as with all these strategies, there's always effort required... to be profitable!

I don't follow pairs trading now, but here's a couple of good journal links for guys that still do:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=134253&perpage=6&pagenumber=357
http://www.aussiestockforums.com/forums/showthread.php?t=14508&page=36

good luck!
 
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