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Hi Ara,
Sunday, April 20, 2003, 9:40:30 AM, you wrote:
AK> If you buy and short similarly ranked producs in same industry,
AK> how do you get confident that one of them will be between 101%
AK> and 150% ( why not lower ?)
Well, I track them over time of course. And there is no guarantee
that the prices will not actually invert. But when you see patterns
repeated over very long numbers of years, you become confident enough
to go with them, at least until they do not work any more. You are
exposed to some risk; make no doubt about it. There could be an
industry realignment that would upset your apple cart. But generally
speaking, long one and short another of similarly ranked stocks in
the same industry is going to be less risk than an outright long or
short. This kind of thing has been a cash cow of mine for longer
than I care to admit.
I find two standard deviations to be a pretty safe bet on pairs that
show little or no long-term trending (the standard deviation lines
run fairly horizontal over a longer time frame -- say 4-5 years or
longer). Just outside 2 is actually where I look. You want to make
the trade actually scream for execution. I usually wait until I
start to hear the screaming, then wait for just a little more.
AK> Also, what king of products do you pair trade? Stocks, currencies etc?
Just stocks. With currencies, I think the risk is substantially
higher for this type of trade because the underlying basics are
probably more volatile. But I would not be surprised to find
something like an A$/US$ pair that could be exploited. For years,
one could have exploited a C$/US$ pair, but in recent years I think
that range has broken into long-unseen territory. I don't follow the
C$ at all however, so I'm not sure.
Best,
Yuki
mailto:yukitaga@xxxxxxxxxxxxx
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