My Pair Trading Journal

Discussion in 'Position Trading' started by GuluGulu, Jan 8, 2013.

  1. GuluGulu

    GuluGulu Well-Known Member

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    These days I am concentrating my focus on market neutral Arbitrage Strategy. Planning to post my own trades regularly at this thread.

    Today done the following trade:

    Bought AXISBANK JAN FUT 1lot @ 1362.75
    Sold YESBANK JAN FUT 1lot @ 501.65

    Reason: STDev= 2.7,
    Correlation: 72% Rising
    Cointegration: 93%

    Profit Target at STDev= 1
     
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  2. gurmy.

    gurmy. Well-Known Member

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    thanks gulugulu for starting a thread on pair trading

    very less material is available on this subject

    from your earlier post it shows u have quite experience in pair trading

    we hope to benifit from u in a long way

    in the mean time if u could explain the strategy of finding pair and how to find corelation,cointegration etc,it will be immence help to all

    thanks and happy trading
     
  3. augubhai

    augubhai Well-Known Member

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    why did you buy axisbank and sell yesbank, and not the opposite?
     
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  4. PartTime_Trader

    PartTime_Trader Well-Known Member

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    Hello

    Good question as both can be done :)

    My view

    This is playing for convergence, i.e. using reversion to mean (the current SD of 2.7 and target of 1, as mentioned in the first post)

    Pair trading can also be done for divergence, i.e assuming that the trend of price deviation between the pairs will continue further.

    Thanks
    (I will also like to read the OPs answers to this question)
     
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  5. PartTime_Trader

    PartTime_Trader Well-Known Member

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    Read basics here

    http://en.wikipedia.org/wiki/Pairs_trade

    http://www.investopedia.com/articles/trading/04/090804.asp#axzz2HMq0gaxA

    http://epchan.blogspot.in/2006/11/cointegration-is-not-same-as.html



    and the last one useful only if u understand the maths/calculas or whatever these equations are :)

    http://www.yats.com/doc/cointegration-en.html
     
    Last edited: Jan 8, 2013
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  6. malgohft

    malgohft Banned

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    i use a ratio spread on bollinger band with trendline usage!
    hws this way of trading pair trading?:)

    btw in ur case/method cn u give an example thru calculation & chart if possible - so that we can understand who u do it?

     
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  7. GuluGulu

    GuluGulu Well-Known Member

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    Attached are two charts of Axisbank-Yesbank Pair from Pairtrade Finder software that I use.

    [​IMG]

    [​IMG]

    In the first image, you can see I have only those pairs populated that has above 90% Co-integration and above 70% Correlation. And today this pair crossed the 2.7 Standard Deviation from mean.

    Arbitrage or Pairs trading believes on historical data and assumes that at some point of time, the pair will revert back to their historical mean, i.e. 0 STDev.

    At the same time, look into the following two pictures of axisbank and yesbank. They are 5 min chart.

    [​IMG]

    [​IMG]

    If you look at the first Axis chart, you will see, Axis retraced 50% Fib level when I took the trade and Yes bank is sitting at top; expecting at least 23.6% Fib level correction here as the Pair is highly correlated and cointegrated.

    Also, in the 2nd picture, you can see the correlation graph is rising. It is very important that you take trade with a rising correlation.

    The above pair can diverge much further from 2.7STDev, in that case, I may add another position at around -20,000 M2M

    As of writing this, it has a miniscule profit of around 2000/-. When it will reach STDev 1, one can expect around 40-50K Profit.

    I am also watching all other pairs shown in the first pic.
     
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  8. PartTime_Trader

    PartTime_Trader Well-Known Member

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    Thanks GuluGulu for starting this Statistical Arbitrage Trading journal
     
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  9. malgohft

    malgohft Banned

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    thks gulugulu!

    couple of queries:
    1. do u pair trade on daily TF based calculations or intraday too?
    2. if i dont use pairtradefinder, can you post the excel calculations (involving cointegration, correlation & standard deviation) if any so that i can do it manually!

     
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  10. GuluGulu

    GuluGulu Well-Known Member

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    Hi Mal,

    Well, Pair trading is done on daily basis as you may have to hold a pair for 1 to 3 months - Intraday can be traded but a bit tricky and need very sophisticated calculations.

    PairTrade Finder is ideal software for it. You can download it free for a 30-day trial period.

    I have little tried Excel sheets for Pair Trading...Many do...I have heard, but don't know much about those Excel sheets.

    BTW; today morning, the above Pair is showing M2M Loss.

    Its on daily time frame, so you will have to observe those M2M loss without taking any intraday bad decision.

    Currently I am running 5 pairs with total 58K M2M Loss... I have 23L capital deployed in the market.

    Cheers,

    May God Bless all of us,

    Warm Regards,
    GG
     
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