brendansvest
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Any interest in an algorithmic strategy to trade index pairs?
Index Pairs Trading
- Thread starter brendansvest
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oildaytrader
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It works fine until it blows your account .This happens when indexes correlation fails and gap widens between indices.
O D T
brendansvest
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How many indicies did you trade at one time?
oildaytrader
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I never traded them , but I let the clever guys blow their accounts.
It was long 1 dow and short 2 ftse or short 1 dow long 2 ftse
brendansvest
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That sounds like a bad ratio to me. Not surprised they blew up!
oildaytrader
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brendansvest
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It can work. We have a guy who trades across 5-6 indices at a time trying to lock in a % turn and has returned 65% in the last 15 months. It seems to be the deeper your pockets are the more successful you can be as as far as I can see you have to give it a reasonable amount of time to see if the system works.
oildaytrader
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I know a guy made #250,000 gbp on pairs trading indices , before he blew it all and another #100k .He though it would come back
brendansvest
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When you say "come back" do you mean he held it for ages? If so, schoolboy error, cut your losses!!
Martinghoul
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I am interested... I do things like that already in other asset classes and want to do some more work on indices.
brendansvest
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I just like the idea of being "market neutral" for a percentage of capital on risk.
Weighbridge
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Mustn't forget that trading in this way will dramatically increase your costs.
Firstly you're betting on two instruments rather than one, so that that'll double the cost.
Secondly, indices are generally correlated, so any change in their price differential will be comparatively small. That means that your position size needs to be much bigger, which adds more cost.
A crude example:
As for the guy that runs 5 indices at once... well... I bet he'll be getting a Christmas card from his bookie this year! Good for him if he's making it pay though.
Some people can tolerate their costs increasing by a factor of 6, e.g. if their pairs strategy is very profitable or they are working on a high timeframe. But I think that for many the costs would wreck their profitablity in the long run.
Firstly you're betting on two instruments rather than one, so that that'll double the cost.
Secondly, indices are generally correlated, so any change in their price differential will be comparatively small. That means that your position size needs to be much bigger, which adds more cost.
A crude example:
FTSE goes up 4%
DAX goes up 3%
So a strategy of long FTSE short DAX yields 1%
So your position would need to be 3 or 4 times larger than someone playing a single index outright, and you would need to buy it for one index and sell it for the other.
So your costs would be 6 to 8 times higher compared to a normal single index trade.
DAX goes up 3%
So a strategy of long FTSE short DAX yields 1%
So your position would need to be 3 or 4 times larger than someone playing a single index outright, and you would need to buy it for one index and sell it for the other.
So your costs would be 6 to 8 times higher compared to a normal single index trade.
As for the guy that runs 5 indices at once... well... I bet he'll be getting a Christmas card from his bookie this year! Good for him if he's making it pay though.
Some people can tolerate their costs increasing by a factor of 6, e.g. if their pairs strategy is very profitable or they are working on a high timeframe. But I think that for many the costs would wreck their profitablity in the long run.
oildaytrader
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Just an illusion
brendansvest
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Well, maybe. Our guy seems to be having iot off. 65% after comm aint too shabby.
oildaytrader
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If you sell his services for 10 % cut, get a dozen zombies to part with cash, you can make 120% a year risk free.This is no encouragement to flood this board with services, but purel an idea.
O D T
brendansvest
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That is basically the idea ODT. It does look like he has cracked it but as we know all trading is fraught with danger. Thanks for the input.
windsurfing_stew
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Very interesting area of research. Consider an intermarket strategy to trade FTSE futures based on AUS and DOW futures. While the underlying shares in the FTSE index are not trading then the price of the FTSE futures must be based on the market's intermarket systems (or at least in the absense of news) based on AUS and DOW futures etc plus/minus a noise contribution. This would suggest and arbitrage opportunity if we could model the market's intermarket's systems effectively to cut out the noise. Anyone attempted anything like this?
mauzj
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That's not really true.
If you want to trade spreads across different exchanges at an exchange you might need to put down a lot of risk capital to trade a relatively small size. And the software is about £1k a month, and you need it if you don't want to get legged. Trading fees are also higher, so you can't do short term spreads on a retail account.
There is also a lot of false feedback trading index pairs on a mean reverting basis. If you win once, the chances are you got lucky.
It is possible to make money trading spreads, but if you're new to trading, you're probably better off learning to trade normal contracts directionally.
