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I just
did a quick scan, looking for some new pairs to trade next
week.
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My
method of calculating correlation (there is no real standard) shows IBM and GENZ
as being about 82% correlated. In the scheme of things, that means that
they are quite highly correlated.
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My
method of calculating also shows that they have recently deviated from their
typical correlation enough that I will short IBM and buy GENZ at the next
open.
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If you
look at the two charts, you will probably observe both the correlation and the
recent deviation from the correlation. It is not a science. More of
an art form. My pairs trading system shows that pair as the best
trade for next week. The system cannot tell me how long it will take
for the correlation to pop back in place or, indeed, if it ever will. It
will tell me when to quit the position, hopefully at a modest
profit. Pairs trading is not about home runs. It's about
slow, consistent equity growth with a very low ulcer index. If both
of those companies went down the drain <SPAN
class=113451803-20042003>or if the whole
market has a huge swing in either direction, I'm not
concerned.
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<FONT face=Arial color=#0000ff
size=2>Cheers
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