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I'm
not sure if you understand the logic behind pairs trading. The first
step is to find two stocks/indices that are closely correlated.
Then, wait for them to be non-correlated before selling the best performer and
buying the worst performer. You can't just decide to buy SPY and
short DIA. I don't think those two are correlated enough to suit pairs
trading.
<FONT face=Arial color=#0000ff
size=2>
You
are correct when you say it reduces your take on a large market move with lower
risk.
<FONT face=Arial color=#0000ff
size=2>
I'll
let Yuki tell you about how long his trades last, but mine tend to be less than
30 days. I got the impression from Yuki that it is not uncommon for him to
have a pair on for a year or more.
<BLOCKQUOTE
>
<FONT face="Times New Roman"
size=2>-----Original Message-----From: Ara Kaloustian
[mailto:ara1@xxxxxxxxxx]Sent: Saturday, April 19, 2003 10:50
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: Re: [amibroker]
Pairs Trading (a definition for Dingo)
Yuki,
One more question....
I tried playing DIA / SPY pair... which worked OK
in just a short time frame (days / weeks), but the % return seems
limited.
Example: 100 shares DIA = $8,000 ......... 100
shares SPY = $8,500 (approximately). Total capital tied up $16.5K (or $8.25K
on margin)
The % return is the differential price movment
... so relative to individual issue price movements it reduces your take (and
risk) significantly, especially when you consider paying (at least tying up
your money) for 2 items.
In short, what kind of % return (of your tied up
capital) are you getting to keep you happy <FONT face=Arial
size=2> and roughly how long is a typical trade?
Have a great day
Ara
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Yuki
Taga
To: <A title=amibroker@xxxxxxxxxxxxxxx
href="">Ara Kaloustian
Sent: Saturday, April 19, 2003 6:46
PM
Subject: Re: [amibroker] Pairs Trading
(a definition for Dingo)
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 guaranteethat the prices will
not actually invert. But when you see patternsrepeated over very
long numbers of years, you become confident enoughto go with them, at
least until they do not work any more. You areexposed to some
risk; make no doubt about it. There could be anindustry realignment that
would upset your apple cart. But generallyspeaking, long one and short
another of similarly ranked stocks inthe same industry is going to be
less risk than an outright long orshort. This kind of thing has
been a cash cow of mine for longerthan I care to admit.I find
two standard deviations to be a pretty safe bet on pairs thatshow little
or no long-term trending (the standard deviation linesrun fairly
horizontal over a longer time frame -- say 4-5 years orlonger). Just
outside 2 is actually where I look. You want to makethe trade actually
scream for execution. I usually wait until Istart 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 substantiallyhigher
for this type of trade because the underlying basics areprobably more
volatile. But I would not be surprised to findsomething like an
A$/US$ pair that could be exploited. For years,one could have
exploited a C$/US$ pair, but in recent years I thinkthat range has
broken into long-unseen territory. I don't follow theC$ at all
however, so I'm not
sure.Best,Yukimailto:yukitaga@xxxxxxxxxxxxxSend
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