Traderji.com


Pair Trading

Discuss Pair Trading at the Advanced Trading Strategies within the Traderji.com; Although there are a couple of threads on pair trading on this forum , i ...


Go Back   Traderji.com > METHODS & STRATEGIES > Advanced Trading Strategies


Advanced Trading Strategies Discuss Advanced Trading Systems & Strategies.


Reply
 
Thread Tools
  #1  
Old 7th March 2015, 09:54 PM
Member
 
Join Date: Dec 2012
Posts: 297
Thanks: 0
Thanked 126 Times in 40 Posts
Big Short will become famous soon enoughBig Short will become famous soon enough
Default Pair Trading

Although there are a couple of threads on pair trading on this forum , i found them lacking on a number of levels and mostly all of them were experimental in nature.
I am doing pair trading since the last 3-4 years and i believe i have finally tailored the model to generate winning trades in excess of 90 percent.
This thread will serve as a platform for people who want to get their questions answered regarding pair trading and statistical arbitrage as well as a journal for my trades.
Reply With Quote
The Following 12 Users Say Thank You to Big Short For This Useful Post:
amitrandive (7th March 2015), bnftrader1 (8th March 2015), gmt900 (8th March 2015), lemondew (8th March 2015), manojborle (22nd March 2015), mastermind007 (7th March 2015), pankajpari (12th March 2015), Purushotham (23rd March 2015), rajesh0000 (8th March 2015), Smart_trade (7th March 2015), sr114 (7th March 2015), ybha (8th March 2015)

Looking for a share broker?

Name:Phone:
Email:City:
State:
Are you a day trader?
  #2  
Old 7th March 2015, 10:03 PM
Member
 
Join Date: Sep 2005
Location: India
Posts: 1,716
Thanks: 1,025
Thanked 1,325 Times in 743 Posts
sr114 has much to be proud ofsr114 has much to be proud ofsr114 has much to be proud ofsr114 has much to be proud ofsr114 has much to be proud ofsr114 has much to be proud ofsr114 has much to be proud ofsr114 has much to be proud ofsr114 has much to be proud ofsr114 has much to be proud of
Default Re: Pair Trading

Quote:
Originally Posted by Big Short View Post
Although there are a couple of threads on pair trading on this forum , i found them lacking on a number of levels and mostly all of them were experimental in nature.
I am doing pair trading since the last 3-4 years and i believe i have finally tailored the model to generate winning trades in excess of 90 percent.
This thread will serve as a platform for people who want to get their questions answered regarding pair trading and statistical arbitrage as well as a journal for my trades.
1. How is this pair : Bnak Nifty futures current month and Nifty futures current month ?

2. How to determine when to sell Banknifty buy Nifty or vice versa?

rgds
Reply With Quote
The Following 4 Users Say Thank You to sr114 For This Useful Post:
mastermind007 (7th March 2015), pankajpari (12th March 2015), shirajroz (7th March 2015), Somatung (13th March 2015)
  #3  
Old 7th March 2015, 10:07 PM
Riskyman's Avatar
Member
 
Join Date: Feb 2013
Posts: 2,212
Thanks: 2,240
Thanked 4,163 Times in 1,622 Posts
Riskyman has a reputation beyond repute
Riskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond repute
Default Re: Pair Trading

Quote:
Originally Posted by Big Short View Post
Although there are a couple of threads on pair trading on this forum , i found them lacking on a number of levels and mostly all of them were experimental in nature.
I am doing pair trading since the last 3-4 years and i believe i have finally tailored the model to generate winning trades in excess of 90 percent.
This thread will serve as a platform for people who want to get their questions answered regarding pair trading and statistical arbitrage as well as a journal for my trades.
Nice initiative. Keep us posted. Just out of curiosity.. Do you use any software to compute correlation and co-integration of stocks or do you run your own excel sheet?

I have done a lot of pair trading myself in the past. While it can be rewarding, in some case waiting for the pair to revert to mean can be frustrating. Im the edgy kind of guy so i need my stock doing something or the other all the time.

Good luck.
Reply With Quote
The Following 2 Users Say Thank You to Riskyman For This Useful Post:
mastermind007 (7th March 2015), pankajpari (12th March 2015)
  #4  
Old 7th March 2015, 10:13 PM
Member
 
Join Date: Dec 2012
Posts: 297
Thanks: 0
Thanked 126 Times in 40 Posts
Big Short will become famous soon enoughBig Short will become famous soon enough
Default Re: Pair Trading

Quote:
Originally Posted by sr114 View Post
1. How is this pair : Bnak Nifty futures current month and Nifty futures current month ?

2. How to determine when to sell Banknifty buy Nifty or vice versa?

rgds

Doing pair trading in between indices is not supported by theory as the 2 indices may diverge due to a variety of reasons. Some of the reasons may be sectoral churning, dependency of a certain index on a single macro factor etc.
Like in the case of banknifty the macro variable can be interest rates or some action by the Central Bank. ( like raising the MSF etc.) or in the case of CNX IT the macro variable may be currency ( specifically USD/INR).

However a pair trading model is not based on fundamentals, the execution is based on statistical inputs and data points. I have traded the pair of nifty and banknifty several times not because i expect it to converge based on fundamentals but just purely out of mean reversion.

On your second question on when to buy nifty or sell it, thats actually a million dollar question. I will try to answer that after i have my dinner
Hope you got some help and information regarding your 1st question.
Reply With Quote
The Following 9 Users Say Thank You to Big Short For This Useful Post:
amitrandive (8th March 2015), candle (8th March 2015), manojborle (22nd March 2015), mastermind007 (7th March 2015), pankajpari (12th March 2015), rajesh0000 (8th March 2015), shirajroz (7th March 2015), sr114 (7th March 2015), ybha (8th March 2015)
  #5  
Old 7th March 2015, 10:16 PM
amitrandive's Avatar
Member
 
Join Date: Jul 2010
Posts: 8,799
Thanks: 17,953
Thanked 24,048 Times in 7,371 Posts
amitrandive has a reputation beyond reputeamitrandive has a reputation beyond reputeamitrandive has a reputation beyond reputeamitrandive has a reputation beyond repute
amitrandive has a reputation beyond repute
Default Re: Pair Trading

Quote:
Originally Posted by Big Short View Post
Although there are a couple of threads on pair trading on this forum , i found them lacking on a number of levels and mostly all of them were experimental in nature.
I am doing pair trading since the last 3-4 years and i believe i have finally tailored the model to generate winning trades in excess of 90 percent.
This thread will serve as a platform for people who want to get their questions answered regarding pair trading and statistical arbitrage as well as a journal for my trades.
Great Big Short!!!
Looking forward to this thread.
Reply With Quote
The Following User Says Thank You to amitrandive For This Useful Post:
mastermind007 (7th March 2015)
Advertisements
  #6  
Old 7th March 2015, 10:19 PM
Member
 
Join Date: Dec 2012
Posts: 297
Thanks: 0
Thanked 126 Times in 40 Posts
Big Short will become famous soon enoughBig Short will become famous soon enough
Default Re: Pair Trading

Quote:
Originally Posted by Riskyman View Post
Nice initiative. Keep us posted. Just out of curiosity.. Do you use any software to compute correlation and co-integration of stocks or do you run your own excel sheet?

I have done a lot of pair trading myself in the past. While it can be rewarding, in some case waiting for the pair to revert to mean can be frustrating. Im the edgy kind of guy so i need my stock doing something or the other all the time.

Good luck.
Thanks.
I do run my own excel sheet. Correlation can be done in excel easily. Its the co-integration part which takes time. Co-integration can be calculated by 2-3 different methods, specifically ADF test ( Augmented Dicky-Fueller Test ) or by Johansons Test and using OLS ( Ordinary Least Square ) as well.

Although the theortical papers and books tell us that co-integration is a must, it actually is a hindrance while doing pairs trading. I had run Co-integration test on the entire F&O universe ( well almost the entire F&O) and came up with no pairs which were fully integrated. Hence i do not use co-integration. I rarely look at correlation as well. I ll explain it in future posts. Hope to see you around here more and learn from your experiences as well
Reply With Quote
The Following 6 Users Say Thank You to Big Short For This Useful Post:
amitrandive (8th March 2015), mastermind007 (7th March 2015), pankajpari (12th March 2015), shirajroz (7th March 2015), sr114 (7th March 2015), ybha (8th March 2015)
  #7  
Old 7th March 2015, 10:28 PM
Riskyman's Avatar
Member
 
Join Date: Feb 2013
Posts: 2,212
Thanks: 2,240
Thanked 4,163 Times in 1,622 Posts
Riskyman has a reputation beyond repute
Riskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond repute
Default Re: Pair Trading

Quote:
Originally Posted by Big Short View Post
not because i expect it to converge based on fundamentals but just purely out of mean reversion.
The entire premise of PT is built on mean reversion only. Indices, like you mentioned can go haywire due to underlying macros. But All sub indices will eventually repeat eventually revert to mean with the primary index. Whether it happens in 1 day or 1 year or 10 it always catches up.
Reply With Quote
The Following 4 Users Say Thank You to Riskyman For This Useful Post:
mastermind007 (7th March 2015), pankajpari (12th March 2015), rajesh0000 (8th March 2015), shirajroz (7th March 2015)
  #8  
Old 7th March 2015, 10:39 PM
Riskyman's Avatar
Member
 
Join Date: Feb 2013
Posts: 2,212
Thanks: 2,240
Thanked 4,163 Times in 1,622 Posts
Riskyman has a reputation beyond repute
Riskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond reputeRiskyman has a reputation beyond repute
Default Re: Pair Trading

Quote:
Originally Posted by Big Short View Post
Thanks.
I do run my own excel sheet. Correlation can be done in excel easily. Its the co-integration part which takes time. Co-integration can be calculated by 2-3 different methods, specifically ADF test ( Augmented Dicky-Fueller Test ) or by Johansons Test and using OLS ( Ordinary Least Square ) as well.

Although the theortical papers and books tell us that co-integration is a must, it actually is a hindrance while doing pairs trading. I had run Co-integration test on the entire F&O universe ( well almost the entire F&O) and came up with no pairs which were fully integrated. Hence i do not use co-integration. I rarely look at correlation as well. I ll explain it in future posts. Hope to see you around here more and learn from your experiences as well
These days I'm living on this forum. So, im sure we will bump in very often.

Of course we may never find anything thats fully integrated but if they are close to being "closely integrated" then it works. Correlation is a must. Correlated stocks tend to give better returns and are more predictable in nature. I've held some trades for over 4 months at a time with no sign of making profits. Ive exited such trades due to sheer boredom of watching them do nothing. Of course some day they did revert to mean and had i held on to them i would have made money. The question I ask then is " what is my opportunity cost of holding these positions?".
Reply With Quote
The Following 4 Users Say Thank You to Riskyman For This Useful Post:
manojborle (22nd March 2015), mastermind007 (7th March 2015), pankajpari (12th March 2015), rajesh0000 (8th March 2015)
  #9  
Old 7th March 2015, 10:50 PM
Member
 
Join Date: Dec 2011
Posts: 2,323
Thanks: 3,716
Thanked 2,294 Times in 1,221 Posts
mastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond reputemastermind007 has a reputation beyond repute
Default Re: Pair Trading

Quote:
Originally Posted by Big Short View Post
Although there are a couple of threads on pair trading on this forum , i found them lacking on a number of levels and mostly all of them were experimental in nature.
I am doing pair trading since the last 3-4 years and i believe i have finally tailored the model to generate winning trades in excess of 90 percent.
This thread will serve as a platform for people who want to get their questions answered regarding pair trading and statistical arbitrage as well as a journal for my trades.
Great !! shall look forward to your postings....
Reply With Quote
  #10  
Old 8th March 2015, 12:15 AM
Member
 
Join Date: Dec 2012
Posts: 297
Thanks: 0
Thanked 126 Times in 40 Posts
Big Short will become famous soon enoughBig Short will become famous soon enough
Default Re: Pair Trading

Quote:
Originally Posted by Riskyman View Post
Of course we may never find anything thats fully integrated but if they are close to being "closely integrated" then it works. Correlation is a must. Correlated stocks tend to give better returns and are more predictable in nature. I've held some trades for over 4 months at a time with no sign of making profits. Ive exited such trades due to sheer boredom of watching them do nothing. Of course some day they did revert to mean and had i held on to them i would have made money. The question I ask then is " what is my opportunity cost of holding these positions?".
There are multiple reason due to which i dont use correlation or cointegration. I must confess in my earlier years i used to obsess over both of them but over the years i have grown to realize that its not of much use.

Out of correlation and cointegration, the latter is of course the superior statstical tool. however, there are very very few pairs which are fully or "closely integrated". I mean if you will run the test you will find very very very few pairs which are cointegrated at 90 percent confidence interval.
Even if we do find such pairs, they very rarely diverge from each other hence we dont get much trading opportunities. ( once a year types )

Correlation is a useless metric in pair trading. Firstly it does not tell you the causality. Secondly , historical correlation does not point out to future correlation. Thirdly, the coefficient of correlation will vary greatly across time frames ( monthly, 3 monthly , 6 monthly and yearly ).

Apart from their individual drawbacks, what is a common drawback with both of them is that they dont tell us about "Structural Breaks" in pairs. Structural breaks may happen in between a fully cointegrated pair as well as a fully correlated pair ( correl coefficient =1 ). It may happen due to a variety of reasons like Earnings Surprise , M&A activity, Company Specific factors like fabrication, fraud, governance, promoters selling their stake etc. etc.


About the opportunity cost of holding a pair, we break down our trading system to trade 4 types of signals.
1. Very Short Term ( 1-2 Days or even Intra Day)
2. Short Term ( 3-7 Days )
3. Positional ( 5-20 Days )
4. Tracking the Structural Break

The days mentioned are working days, obviously. Now the time frame which is the highest is obviously the 4th one when a pair undergoes structural break. We obviously dont know the reason behind the structural break until very late ( when we read about it in media ). So the opportunity cost is highest in the 4th category.
Reply With Quote
The Following 13 Users Say Thank You to Big Short For This Useful Post:
amitrandive (8th March 2015), candle (8th March 2015), manojborle (22nd March 2015), mastermind007 (8th March 2015), pankajpari (12th March 2015), PRANATHP (30th March 2015), PUCHU_2500 (8th March 2015), Purushotham (23rd March 2015), rajesh0000 (8th March 2015), Smart_trade (8th March 2015), sr114 (8th March 2015), trader_ks (10th March 2015), ybha (8th March 2015)
Reply

Bookmarks

Tags
pair trading


Advertise Here

Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads for: Pair Trading
Thread Thread Starter Forum Replies Last Post
pair trading nagbhushan5 Advanced Trading Strategies 0 28th November 2013 08:06 PM
Pair Trading ivanboesky Futures 27 25th September 2013 10:41 PM
help on PAIR TRADING harishb63 Development of Software Utilities 7 26th July 2013 11:08 AM
What is Pair Trading ? manishmakvana Advanced Trading Strategies 4 18th July 2013 12:34 PM
Pair Trading wsunil Advanced Trading Strategies 6 31st January 2013 01:08 PM


All times are GMT +5.5. The time now is 08:54 AM.

Indemnity, Disclaimer & Disclosure Notice:
* By visiting Traderji.com you automatically indicate that you agree to our Forum Rules, Indemnity, Disclaimer & Disclosure Notice and General Content Disclaimer Notice and indemnify Traderji.com, its associates and related parties of all claims howsoever resulting from the usage of the forum/site.
* Disclaimer: Trading or investing in stocks & commodities is a high risk activity. Any action you choose to take in the markets is totally your own responsibility. You are recommended to make appropriate enquiries and seek appropriate advise before sending money, incurring any expenses, acting on recommendations or entering into any commitment in relation to any advertisement published here. Traderji.com does not vouch for any claims made by the advertisers of products and services. Traderji.com will not be held liable for any consequences in the event such claims are not honoured by the advertisers. Traderji.com will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of any information by anybody mentioned anywhere on this site.
* Disclosure: The information in this forum is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned.
* All names or products mentioned are trademarks or registered trademarks of their respective owners.
General Content Disclaimer Notice:
In light of our policy of encouraging candid, open exchanges of views and the rapid distribution of information originating from many sources, Traderji.com cannot determine the accuracy or legality of any information that may be uploaded to the forum. Opinions, advice and all other information expressed by participants in discussions are those of the author. You rely on such information at your own risk. You are urged to seek professional advice for specific, individual situations and not rely solely on advice or opinions given in the discussions. Since Traderji.com is an open and free discussion forum, any comments made by members of this forum in their posts reflect their own views and not of the owner or administrator of Traderji.com. Thus the owner/administrator indemnify themselves of all claims whatsoever and will not be liable or responsible for any members comments/views in this forum Traderji.com. Although we constantly delete all irrelevant content and/or SPAM, if you should find any objectionable or offensive posts made by members of this forum which you would like to bring to our notice for removal then please Contact Us.
 


Our Partner Websites: www.chittorgarh.com, IPO Investment Portal | www.topsharebrokers.com, Broker Comparision
Copyright © www.Traderji.com 2001 - , All rights reserved.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70