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[amibroker] Pairs Trading (a definition for Dingo)



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I'll 
have a go at defining pairs trading for you.
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To me, 
there are two different kinds of pairs trading (fundamental and 
technical).
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Before 
I get into that, however, I'll start by telling you that pairs trading is 
NOTHING MORE than buying one stock and shorting another.  Usually, the 
dollars invested would be the same for each stock.
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<FONT face=Arial color=#0000ff 
size=2>Fundamental pairs trading would be based on YOUR INTERPRETATION of the 
fundamentals for those two companies.   If you spent the time to 
review the annual reports for Ford and General Motors, for instance, you might 
decide that FUNDAMENTALLY Ford should outperform General Motors over the next 
six months.  So, you would buy Ford and short General Motors.   
Your trade, in theory, should not be affected by any move in the entire market 
or even the automotive sector.   At the end of the six-month period 
you would liquidate both positions.
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<FONT face=Arial color=#0000ff 
size=2>Technical pairs trading is a little more complex.   Again, you 
would be buying one stock and shorting another.   Most pairs 
traders might only trade a "pair" that were in the same sector, but that isn't 
necessarily a requirement.   The idea here is that you find two stocks 
whose average daily returns move very much in unison.  I won't 
get into the math for determining this, but I'm sure you get the 
picture.    Let's say that you discover that the daily 
returns for Ford and General Motors almost aways move together.  
You also observe that if the returns move apart.... they tend to come back 
together.    You also observe the maximum amount that they varied 
over some period of time.   When you see them move apart by that 
amount again, you simply short the one with the higher returns and buy the one 
with the lower returns.  Finally, you just wait for the returns to come 
back together and liquidate both positions.     Again, the 
theory is that any major move in the overall market has no effect on your net 
position.
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I 
might add that many, if not most, of the professional fund managers using pairs 
trading haven't done very well over the last quarter, generating negative 
returns for their investors.    I've been pairs trading for two 
years, netting just over one percent per month for investors in that particular 
fund.    I can also tell you that, in my opinion, any attempt at 
fundamental pairs trading is doomed for failure.
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  <FONT face="Times New Roman" 
  size=2>-----Original Message-----From: dingo 
  [mailto:dingo@xxxxxxxxxx]Sent: Friday, April 18, 2003 3:13 
  PMTo: amibroker@xxxxxxxxxxxxxxxSubject: RE: [amibroker] 
  Re: Dynamic Indicators Poll -- VOTE AGAIN, PLEASE
  <FONT face=Arial color=#0000ff 
  size=2>Could you define "pairs trading" please?
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  <FONT face=Arial color=#0000ff 
  size=2>Thx!
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  <FONT face=Arial color=#0000ff 
  size=2>d
  
    
    <FONT 
    face=Tahoma size=2>-----Original Message-----From: Fred 
    [mailto:fctonetti@xxxxxxxxx] Sent: Friday, April 18, 2003 3:08 
    PMTo: amibroker@xxxxxxxxxxxxxxxSubject: [amibroker] 
    Re: Dynamic Indicators Poll -- VOTE AGAIN, 
    PLEASEYes. I know. See my previous post, but for 
    example I don't want to have to write my own Stdev routine for variable 
    periods where it would require a For loop or a script to get it 
    done.  As I've said before, IMHO the best thing about AB today is 
    it's speed and the LAST thing I want to do is slow it down w/For loops 
    if I don't have to. The best thing about the future of AB is of course 
    the support & potential enhancements and I'll be happy to take the 
    latter in whatever order Tomasz thinks best with my own personal 
    preference at the moment being the fixing of position size transactions 
    being automatically limited to total available cash followed by some 
    other aspects of portfolio trading i.e. pairs and ranking 
    etc.--- In amibroker@xxxxxxxxxxxxxxx, "DIMITRIS TSOKAKIS" 
    <TSOKAKIS@xxxx> wrote:> Fred,> take a look 
    at> > per=10+Cum(1)%20;//variable period from 10 to 29> 
    StochKa=MA(100*(C-LLV(L,per))/(HHV(H,per)-LLV(L,per)),3);> 
    StochDa=MA(MA(100*(C-LLV(L,per))/(HHV(H,per)-LLV(L,per)),3),3);> 
    Plot(StochDa,"",1,1);Plot(StochD(),"",4,8);> > for 
    example.> DT> --- In amibroker@xxxxxxxxxxxxxxx, "Fred" 
    <fctonetti@xxxx> wrote:> > Tomasz,> > > 
    > I agree completely that these are two different areas ... to me 
    > they > > are both important with (1) being higher 
    priority then (2) ...> > > > With regards to (1) and 
    more specifically those functions like ATR > > that require 
    multiple arrays ... I understand and in the case of > ATR > 
    > I'm not sure I care if this is even dealt with as again it's simple 
    > > enough like my example w/MACD to create ones own ATR with a 
    Foreign > > symbol using straight AFL.  > > 
    > > In the case of a stochastic though it's clearly valid to 
    calculate > it > > as > > > > 100 * 
    (C - LLV(C, n)) / (HHV(C, n) - LLV(C, n)) > > > > as 
    opposed to using highs and lows.  However here again I'm not > 
    sure > > I care as it's easy enough to do these in straight AFL 
    with n being > > time variant since HHV and LLV are already 
    have the capability of > > being time variant.> > 
    > > > > --- In amibroker@xxxxxxxxxxxxxxx, "Tomasz 
    Janeczko" > <amibroker@xxxx> > > wrote:> > 
    > Hello,> > > > > > As I mentioned in the other 
    post of mine there are > > > TWO INDEPENDENT areas:> 
    > > > > > 1. Make input data array available for 
    functions like RSI> > > 2. Make second argument (period) accept 
    array too (variable > period).> > > > > > 
    Somehow people mix those 2 areas.> > > > > > Fred 
    speaks that he wants all functions to cover at least> > > area 
    (1).> > > > > > The posts of Mark refer to area 
    (2).> > > > > > Let me show you example:> 
    > > > > > RSI( period ) - this function has no input data 
    array (uses CLOSE > > array> > > indirectly) and 
    accepts static period> > > > > > (1) RSIa( ARRAY, 
    period ) - this function accepts input data > array > > but 
    accepts> > > only static period> > > > > 
    > (2) RSIa( ARRAY, dynamic_period ) -  this function accepts 
    input > > data array > > > and accepts both 
    static and dynamic_period. > > > (NOTE: Current version of AB 
    does NOT support this RSIa 'flavour' > > yet)> > 
    > > > > > > > As to (1): implementation of this 
    is relatively easy.> > > There is one caveat however: many 
    analytical functions> > > in fact use MORE than one input 
    array. For example Stochastics use> > > Close, Open and 
    High arrays as inputs.> > > ATR too needs OHLC, not only 
    close.> > > > > > As to (2): not every function is 
    suitable for this kind of > > operation. Although > > 
    > theoretically it is possible to rewrite every function to accept 
    > > such 'variable> > > periods' the practice shows 
    that transformations that are > recurrent > > in 
    nature> > > (exponential averages for example) are extremely 
    'sensitive' if > > parameter(s)> > > change to fast. 
    A kind of "frequency modulation" effect appears > > that may 
    produce> > > distortions therefore one should be careful 
    working with adaptive > > systems> > > using 
    recurrency-based transformations.> > > > > > Best 
    regards,> > > Tomasz Janeczko> > > 
    amibroker.com> > > ----- Original Message ----- > > 
    > From: <uenal.mutlu@xxxx>> > > To: 
    <amibroker@xxxxxxxxxxxxxxx>> > > Sent: Friday, April 18, 
    2003 5:28 PM> > > Subject: Re: [amibroker] Dynamic Indicators 
    Poll -- VOTE AGAIN, > > PLEASE> > > > > 
    > > > > > And IMHO also > > > 
    >   LINEARREG, LINREGSLOPE, TSF > > > > should 
    be removed from your list. Please> > > > check the remaining 
    too... Test it in AFL editor (it will > inform > > 
    you> > > > via a small hint window about the params after 
    you type the > > opening brace).> > > > UM> 
    > > > > > > > ----- Original Message ----- > 
    > > > From: <uenal.mutlu@xxxx>> > > > To: 
    <amibroker@xxxxxxxxxxxxxxx>> > > > Sent: Friday, April 
    18, 2003 5:21 PM> > > > Subject: Re: [amibroker] Dynamic 
    Indicators Poll -- VOTE AGAIN, > > PLEASE> > > 
    > > > > > > > > > > Hi mark, > 
    > > > > can you clarify BBANDBOT and BBANDTOP; > > 
    > > > IMHO they both already do accept user defined 
    arguments> > > > > for all the 3 possible parameters to 
    them. > > > > > UM> > > > > > 
    > > > > > > > > > ----- Original Message 
    ----- > > > > > From: "markf2" 
    <feierstein@xxxx>> > > > > To: 
    <amibroker@xxxxxxxxxxxxxxx>> > > > > Sent: Friday, 
    April 18, 2003 4:03 PM> > > > > Subject: [amibroker] 
    Dynamic Indicators Poll -- VOTE AGAIN, > > PLEASE> > 
    > > > > > > > > > > > > > 
    > In Message 38132, Tomasz pointed out that HHV, LLV, > HHVBars, 
    > > LLVBars,> > > > > > DEMA, TEMA, MA, WMA, 
    REF, and SUM already work with dynamic> > > > > > 
    parameters. When I updated the poll to reflect this, ALL > > votes 
    were> > > > > > lost so please vote again if you're 
    still interested, LOL.> > > > > > > > > 
    > > > <A 
    href="">http://groups.yahoo.com/group/amibroker/surveys?id=1071266> 
    > > > > > > > > > > > I apologize for 
    the confusion.  The fact that the above > > indicators 
    and> > > > > > functions accept dynamic parameters was 
    reflected in > release > > notes but> > > > 
    > > not in the 4.30 users guide that I used to make the 
    poll.  > > The fact> > > > > > that 
    so many of you voted for them shows you didn't know > > either, 
    and> > > > > > I've asked Tomasz to include this 
    information in the next> > > > > > documentation 
    update.> > > > > > > > > > > > 
    Mark> > > > > > > > > > > > "No 
    good deed goes unpunished."> > > > > > --Steve 
    Karnish> > > > > > > > > > > 
    > > > > > > > > > Send BUG REPORTS to 
    bugs@xxxx> > > > Send SUGGESTIONS to suggest@xxxx> 
    > > > -----------------------------------------> > > 
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