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Since
I was probably near the last of the people on earth to learn about pairs trading
I would think that the game would be over by now. I read somewhere that
there are thousands (10k?) of hedge funds out in the universe and with more than
a few doing the dance of the pairs more and more traders would be jumping
in early since shorting the strong and buying the weak would narrow the gap
very quickly, no? And if more jump in earlier then the gap goes away,
doesn't it?
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Just
trying to not be the "mark".
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<FONT face=Arial color=#0000ff
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<FONT
face=Tahoma size=2>-----Original Message-----From: Chuck Rademacher
[mailto:chuck_rademacher@xxxxxxxxxx] Sent: Saturday, April 19, 2003
11:26 PMTo: amibroker@xxxxxxxxxxxxxxxSubject:
[amibroker] Pairs trading (an example)
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>CheersSend
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