Pairs Trading

[frugi]

No problem Mr Charts. I was interested in your trade and wanted to see it for myself, so posting the chart was a pleasure.

Now I'm afraid I have a question, which my mathematically inept mind is embarrassingly unable to answer.

Here is a 10 min chart of ES overlaid with NQ.

Say I bought ES and sold NQ whenever NQ was >3 ES points above ES (as according to the overlay, not literally), with the view that within a few hours (days at most) they would meet up again and I could pocket a small profit. Whether or not this is a good idea is irrelevant: all I want to know is how many contracts of each I should buy or sell?

I originally thought that 2 ES v 5 NQ would do it but then realised the notional size of the positions would be different, although the $ per whole point would be the same.

I know there's a simple answer but can't quite seem to pluck it from the arid wasteland that is my brain!

Edit ... neurons starting to fire ...

Assume opening the trade at ES 1115, NQ 1485.
Buying 2 ES gives a position of £111500
Selling 5 NQ gives a position of -£148500

So I need my ES position to be 1.33184 times bigger to match them up.
This means I need 2.66363 contracts!
So I guess the closest reasonable approximation would be to go long ES 27 contracts and short NQ 50 contracts.

Eeek there must be a better way!

 

[Rognvald]

"Grey 1and others following this methodology

What factors do you look at to judge the proportionate sizes of your respective longs and shorts please? I ask this as it seems fairly crucial and seems to involve a correlated directional judgement?

asked on 1/1/04
Ron"

 

[Grey1]

ROG,

Three methods

1) use a technical indicator such as ATR and divide the ATR of stock x by stock Y and there you go .. It is no good to choose a stock which moves CENTS against a volatile stock which could move DOLLARS during the same time span .

2) statistical methods

Such as SD.

3) ADHOC .. Just use your experience of stocks with similar volatility ..An experienecd eye can easily recognise the suitability by looking at the 100 bars back .. Once you have two stocks with similar volatilities then you can use price ratio to fine tune your pos size..

 

[neil]

Found this site over at elitetrader re pairs trading.

Might be useful to some of you?

http://www.elitetrader.com/vb/showthread.php?threadid=8533

 

[Grey1]

Hey neil ,,

you are the web king ..

 

[neil]

Grey1
I take it that you jest.

I sell nothing but quite happily share info. I have come across.

Nor do I trade pairs. However, having come across the site I thought it might be useful to put the link here in case anyone discussing pairs wished to avail themselves of the link.

 

[Rognvald]

Neil
There is useful stuff there and it is probably worth looking through for those with sufficient interest. It does not deal much with the vwap strategy being used by Grey 1 and others but with other pairs methods that are a bit less statistically based

Grey1
My choice would be ATR

 

[Grey1]

neil,

Meant to be grateful actually.. thank you for the link ( English not my first language BTW)

regards

 

[anley]

This thread is very funny

 

[neil]

neil,

Meant to be grateful actually.. thank you for the link ( English not my first language BTW)

regards

Glad you liked the link

 

[Mr. Charts]

frugi,
Sorry for the delay answering your question - I've privmailed you the answer.
Best wishes,
Richard

 

[Trader333]

Here is an example of a pair trade between XMSR (Short) and AMGN (Long).

Both trades were entered within a few seconds of each other. Note that from my entry the market then declined taking both stocks down in value but because this was a market neutral strategy my paired trade never went into loss.

You will then see that XMSR declined further and AMGN went up and I closed the trade at 3.44pm for a profit of 67 points.

 

[Trader333]

AMGN Trade:

 

[Grey1]

An skilled Trader at work ..

I can also see your MACCI was at OB and OS point prior to your trade.. ..

It is wonderful to see the effect of MACCI on the L2 screen.. It is like playing a game of chess with known outcome..

Regards

 

[ianh]

Nice trades Paul,
Can you explain the strategy of choosing which stocks to pair against each other?

IanH

 

[Trader333]

Ian,

Quite simple really, Overbought and Oversold against VWAP and the fact that I was alerted to both at the same time and also that they have a history of returning to VWAP when they drift away from it.


Paul

 

[keano]

Paul. Did Grey1 introduce you to the whole VWAP thing? I dont remember seeing the VWAP indicators in your previous screen shots of trades. Good trading anyways. Keep it up.

 

[Trader333]

I became very interested in the posts Grey1 made from the day he arrived here and have done a lot of research myself but yes without those posts I wouldnt be doing it.


Paul

 

[Mr. Charts]

Convergent pair

 

[Trader333]

I am currently in a pair trade of GENZ Short and QCOM Long,
I will post the charts later.


Paul