TheBramble
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Another useful session with Paul making good calls and perhaps as importantly, keeping itchy fingers off sell/buy buttons when the entry criteria was only 'almost' right...
Ratio of Shares in Pair Trading
Still appears to be confusion in some quarters (myself included) over the ratio of shares to buy/sell in pairs trading.
I understand that if for example we expect a 1% move in both stocks, one being at $20 and one at $40 - we need to do our best to ensure we get equal absolute cash movement from both.
So we take twice as many lower-value shares as higher value shares.
That way, a 1% move in the $40 shares gives us 40c and 1% in the $20 shares 20c (X2 we have twice as many) = 40c as well.
Notwithstanding Grey1's formula for position sizing and stoploss calcs from last week - Is it really that simple?
Net/Max StopLoss of 15c
If I understood today's action correctly, we look for a max stoploss of 15c on any pair trade.
So, if I'm prepared to risk 0.5% of my trading capital per trade, and I have trading capital of $50,000 ($250/trade), does that mean I calculate the number of shares to buy in each stock on (a) the ratio of the share prices AND (b) to fit within my max risk per trade?
Using the above example, I have 2X $20 shares and X $40 shares.
If I am prepared to risk 15c per share this means I can trade a total of approx 1500 shares - 1000 $20 and 500 $40 shares.
This means I'm holding or short a total of $40,000.
Is this correct?
If it is, is the 1% profit target discussed this afternoon simply 1% of the total holding - i.e. $400?
And how does this 1% target tie-in with using the reversion to the mean (the vwap) which I thought previously was always used as a target in vwap pair-traing?
Ratio of Shares in Pair Trading
Still appears to be confusion in some quarters (myself included) over the ratio of shares to buy/sell in pairs trading.
I understand that if for example we expect a 1% move in both stocks, one being at $20 and one at $40 - we need to do our best to ensure we get equal absolute cash movement from both.
So we take twice as many lower-value shares as higher value shares.
That way, a 1% move in the $40 shares gives us 40c and 1% in the $20 shares 20c (X2 we have twice as many) = 40c as well.
Notwithstanding Grey1's formula for position sizing and stoploss calcs from last week - Is it really that simple?
Net/Max StopLoss of 15c
If I understood today's action correctly, we look for a max stoploss of 15c on any pair trade.
So, if I'm prepared to risk 0.5% of my trading capital per trade, and I have trading capital of $50,000 ($250/trade), does that mean I calculate the number of shares to buy in each stock on (a) the ratio of the share prices AND (b) to fit within my max risk per trade?
Using the above example, I have 2X $20 shares and X $40 shares.
If I am prepared to risk 15c per share this means I can trade a total of approx 1500 shares - 1000 $20 and 500 $40 shares.
This means I'm holding or short a total of $40,000.
Is this correct?
If it is, is the 1% profit target discussed this afternoon simply 1% of the total holding - i.e. $400?
And how does this 1% target tie-in with using the reversion to the mean (the vwap) which I thought previously was always used as a target in vwap pair-traing?
