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You
may recall that I have been making a concerted effort to come up with some
system ideas using "pairs trading". I don't know how successful any
of you have been at coming up with systems for shorting stocks, but I am
extremely frustrated by the need to maintain a dollar and/or beta neutral
portfolio in keeping with the rules of the funds that I manage. As a rule,
my short trades are lucky to break even. Fortunately, my long trades are
quite profitable.
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I am
going to put forth some ideas that should have been more obvious to me some time
ago and may already be obvious to you. Like a lot of you, I have
what I think are excellent systems for trading the long side. I also have
excellent systems for trading "pairs". My pairs trading has been
100% isolated from the other styles of trading that I do.
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My
daily search for pairs to trade never really had a starting point
(watchlist). The system takes each of the currently
active stocks (8,000+) and tries to find another stock to trade
against it. There was no starting bias. The system looks
for the most highly correlated pairs of stocks to trade; one long and one
short.
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Late
yesterday, I had a thought come to me to take the just the buy signals generated
by my best "long" system and only look for a pair to trade against each of
those. It's early days in the research, but it looks like an exceptionally
good idea. Instead of making a mediocre 1.5 to 2% per month, the
research suggests almost doubling that return while still maintaining a dollar,
beta, sector and volatility neutral stance.
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Any
comments would be appreciated and I'd be happy to work closely with anyone
interested in pursuing this endeavour. AmiBroker is definitely the
tool of choice for this job, hence my posting to this group.
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<FONT face=Arial color=#0000ff
size=2>Cheers
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