Tips when Trading Commodity ETFs

ETFs have become highly sought after investments due to their prices. Real commodities are expensive and need inventory, while ETFs are cheaper and do not need physical storage.

Buying ETFs is easy as they can be purchased through a service broker or an online provider. Despite this, however, there are specific considerations that traders must keep in mind when trading commodity ETFs.

So, if you trade commodities, here are some expert tips for you to consider moving forward.

The volume that appears on the screen does not automatically equate to its liquidity

Unlike stocks and LICs, commodities are open-ended. This means that the units for trade can be redeemed or created by a fund manager. When more volume appears for a particular commodity, it doesn’t necessarily mean that the demand for it is high. That’s because an ETF is able to issue new units constantly as long as the assets are increasing.

Keep in mind limit orders

Use limit orders instead of market orders. Limit orders are much better in the sense that you are settled at your chosen price. You can check the status of your ETFs using INAV or “Indicative Net Asset Value”. Since market prices fluctuate throughout the day, INAV tends to change quickly as well. Any changes that you can see on the INAV also reflect on the bid price.

Volatile markets have big spreads. Therefore, your assets will most likely be placed at a wide spread. There are instances where big orders will settle at a different price from what is indicated on the INAV. So it is advisable to keep using limit orders in order to get your ideal price.

Check INAV before placing an order

As previously mentioned, you can check the status of your ETFs using the INAV. Those who issue ETFs give traders an indication of real-time net asset values. Because this calculation changes from time to time, the number calculated is referred to as the INAV. Remember to always check the INAV so you can see the estimated value of a commodity ETF during any given trading day.

Wait until the dust has settled

ETF prices are extremely volatile when the markets have just opened or when they are about to close. Therefore you should begin trading when the dust has settled. Wait 10 minutes after the markets have opened, and stop 10 minutes before they close.

Trading commodity ETFs are just like trading any other stock or forex. If you want to sharpen your skills, you can always use a dummy account. There are many platforms that provide dummy accounts that will give you an introduction into the world of trading online.  MetaTrader 4 on FXCM allows traders to access markets from around the world requiring very little capital to start. Like many other innovative trading platforms, MT4 is designed to give users the ability to gain insights before they plunge head first into serious trading. It’s resources like this that will help you transition seamlessly into the financial markets through making trades with small amounts of money, slowing working your way up the more confident you become.

Remember, before trading ETFs, check the fundamental factors that affect the market. Fear and inflation are variables that affect the prices of commodities.

 

Contact us to start your 30-day free trial of Pairtrade Finder software, the perfect software tool designed to help you easily and quickly find high probability securities pairs to trade.

Tips on Setting Up My Watch List – Avoiding Industry and Single Stock Concentration

Your watch list will act as your home screen where you can evaluate pairs that have back tested through the Pair Trade Finder system.  After you have gone through the process of finding pairs to evaluate, back testing them, and adding them to the system, your pairs will be viewable on your watch list. There are a few important issues you should consider when developing a portfolio of stock pairs to watch, which include the number of specific industry pairs you should monitor, single stock concentration and how to anticipate a signal.

After you have gone through the process of finding companies that are in similar industries, you can add them to the Pair Trade Finder system, with a description as you are adding them to a group. This description will help you monitor these stock pairs when you are evaluating your watch list.  You might considered labeling them with sector names, such as financials, or energy.

You goal is to add approximately 5-8 pairs, that you monitor in your watch list.  You want to find the pair that are most attractive to you through the back testing process.  You can use criteria such as winning percentage or most profitable or even choose trades with the highest correlation or co-integration.  You want to avoid having too many pairs in the same industry as this might alter your long term performance. By having a heavy concentration of pairs in one industry a specific event might generate many signals that all move in tandem, and generate unwanted losses.

Additionally, you also want to avoid signal stock risk.  By having multiple pairs with the same stock, you could create signal stock risk where multiple signals are generated at the same time because a stock experienced negative headline news or even positive market information.  For example, if you had 4-pairs were Banks of America is paired versus, Citigroup, Morgan Stanley, J.P. Morgan Chase and Wells Fargo, and Bank of America has worse than expected earnings results, you will get 4-signals, and may experience 4-losing trades.

You can sort your watch list by group and see how many pairs you have per sector and reduce this number by the criteria that you deem the most important.

Lastly, each headline in your watch list provides you with the capability to sort using that title.  By sorting with the deviations from mean title, you can monitor the level and anticipate a change above or below your signal.  If your signal is 2.7 standard deviations above the 100-day moving average, then as a pair climbs toward that level you can begin to monitor that pair and determine if you are interested in that trade if a signal is generated.

Contact us to start your 30-day free trial of Pairtrade Finder software, the perfect software tool designed to help you easily and quickly find high probability securities pairs to trade.

The Mother of All ETF Pair Trades May Be Setting Up…

An interesting analysis from Goldman Sachs on the ETF’s with the highest concentration of funds in their top three constituents, and an ETF pair trade idea from Zero Hedge on how to arbitrage the resulting risk:

http://www.zerohedge.com/news/2017-05-11/these-are-most-and-least-concentrated-etfs

Enjoy.

Pairtrade Finder

Pair Trade COH Versus TJX

The Pairtrade Finder analytic generated a signal to purchase TJX Companies and Sell/short Coach.  Both companies are in the retaill space.  Coach surged on better than expected earnings, but is likely to run into resistance after climbing nearly 10%, as sales missed expectations.  TJX is scheduled to release its financial results in 2-week.  The watchlist shows the levels to enter the trade, as the stretch reached 2.7 standard deviations above the 100-day moving average.

The backtest of the two stocks shows that over the past 3-years 8-signals were generated with a stretch of 2.7 standard deviations for an entry criteria, and a take profit or stop loss when the ratio (the price of COH / TJX) reverted back to 1-standard deviation below the 100-day moving average.

The results were extremely impressive. The pair has a winning percentage of 100%.  The profit per trade was approximately $550.  The overall profit on the strategy over the 3-year period is $4,407, and the average correlation of the returns of the two shares is approximately 64%.

The trading signal section will describe the number of shares that need to be transacted if you use $10K on each side of the trade.  You would need to purchase 128 shares of TJX at approximately $77.99 and short sell 233 shares of COH at approximately $42.75.  The ratio is approximately TJX/COH of 1.82, or COH/TJX at 0.43.

The chart of the pair shows that the ratio (lower right) tumbled to the low end of the distribution, as it chops around in a broad range.

Contact us to start your 30-day free trial of Pairtrade Finder software, the perfect software tool designed to help you easily and quickly find high probability securities pairs to trade.

Pair Trade BBT Versus CFG

The Pairtrade Finder analytic generated a signal to purchase BB&T Corp and Sell/short Citizens Financial Corp.  Both companies are in the financial space.  Both stocks were buoyed following better than expected earnings, although the CFG was definitely a larger surprize.  BB&T was upgraded and should recoup some of its recent losses versus CFG.  Both companies released their earning during the week ending the 21st.   The watchlist shows the levels to enter the trade, as the stretch reached 2.7 standard deviations below the 100-day moving average.

 

The backtest of the two stocks shows that over the past 3-years 4-signals were generated with a stretch of 2.7 standard deviations for an entry criteria, and a take profit or stop loss when the ratio (the price of CLF / SWC) reverted back to 1-standard deviation below the 100-day moving average.

The results were extremely impressive. The pair has a winning percentage of 100%.  The profit per trade was approximately $450.  The overall profit on the strategy over the 3-year period is $1,801, and the average correlation of the returns of the two shares is approximately 86%.

 

The trading signal section will describe the number of shares that need to be transacted if you use $10K on each side of the trade.  You would need to purchase 226 shares of BBT at approximately $44.07 and short sell 371 shares of CFG at approximately $36.50.  The ratio is approximately 1.23.

 

 

The chart of the pair shows that the ratio (lower right) tumbled to the low end of the distribution, which moved in tandem with the spread.

 

Contact us to start your 30-day free trial of Pairtrade Finder software, the perfect software tool designed to help you easily and quickly find high probability securities pairs to trade.

Look At That Divergence! Are Target and Walmart a Pair Trade?

Based on the last year of price history, it would seem there is quite a divergence between Target (orange) and Walmart (white) share prices (see Bloomberg chart below). The pairs look fairly correlated, and there is a large divergence, so should you expect a return to the mean, and short Walmart and go long Target?
divergence 419

Upon further consideration, this would be a dangerous trade to take.  First the y-axes are not synchonised and the prices have not been re-based to zero.

If one rebases the prices to zero (see below), then one can see that over the past year there is little correlation between the two pairs and that the divergence does not necessarily indicate any potential reversion to the mean. The divergence in prices could be based purely on fundamentals.

divergence2419

Source: www.pairtradefinder.com

Second, one should check the actual correlation of the two pairs. The chart below shows the declining correlation over the past year between Walmart and Target, which is now a negative correlation.  The correlation is now down to about -19%.

divergence3419

 

Source: www.pairtradefinder.com

Third, if one backtests the performance of the two shares over the past year (see below), then it is clear from the plus minus chart that there would have been two profitable trades over the past 12 months (using an entry stretch of 2.0 and exit stretch of 0.0).

 

divergence4419

Source: www.pairtradefinder.com

Assuming a trade sixe of $10,000 per leg and commissions of 0.20%, one would have expected a net profit of approximately $950.

However, the volailtity of the pairs has been very high. As one can see from the chart below, while the cumulative profit from the two pairs at one point during the year would have hit approximately $1,100, it was also running at a loss of nearly -$300 for part of the year. Indeed, the trade is currently running at a cumualtive loss of of -$200.

divergence5419

Source: www.pairtradefinder.com

 

The lesson? Don’t just look at one chart or listen to a journalist’s view and assume a trade should be a good trade. Do your homework first. It doesn’t have to take long. You can do a backtest and news analysis in about 10 minutes or less. For the sake of your profits, take your time and do it right.

Contact us to start your 30-day free trial of Pairtrade Finder software, the perfect software tool designed to help you easily and quickly find high probability securities pairs to trade.

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Pair Trade CLF Versus SWC

The Pairtrade Finder analytic generated a signal to purchase Cliffs Natural Resources and Sell/short Still Water Mining Co. Both companies are in the mining and natural resources space. Infrastructure stocks, which include CLF are under pressure, as traders are concerned about the viability of Trumps legislative plans. CLF is scheduled to release earnings which are on April 27 and Still Water is schedule to provide financial results on May 5th, 2017. The is no stock specific news that is driving the pair lower.
The watchlist shows the levels to enter the trade, as the stretch reached 2.7 standard deviations below the 100-day moving average.
clf-swc 4-17-17
The backtest of the two stocks shows that over the past 3-years 5-signals were generated with a stretchof 2.7 standard deviations for an entry criteria, and a take profit or stop losswhen the ratio (the price of CLF/SWC) reverted back to 1-standard deviation below the 100-day moving average. The results were extremely impressive. The pair has a winning percentage of 100%. The profit per trade is slightly more than $1,238. The overall profit on the strategy over the 3-year period is $6,1920, and the average cointegration of the returns of the two shares is approximately 95%.
clf-swc 2 4-17-17
clf-swc 3 4-17-17
The trading signal section will describe the number of shares that need to be transacted if you use $10K on each side of the trade. You would need to purchase 1,470 shares of CLF at approximately $6.8 and short sell 599 shares of SWC at approximately $17.87. The ratio is approximately 0.41.
The chart of the pair shows that the ratio (lower right) tumbled to the low end of the distribution, which moved in tandem with the spread.
Contact us to start your 30-day free trial of Pairtrade Finder software, the perfect software tool designed to help you easily and quickly find high probability securities pairs to trade.
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Pair Trade HAL Versus TS

The Pairtrade Finder analytic generated a signal to purchase Haliburton and Sell/short Tenaris SA.  Both companies are oil service giant.  There was news reported on Tuesday that Tenaris believed that the jobs it will be creating in Texas will allow them to still import steel for their products into the United States.

The watchlist shows the levels to enter the trade, as the stretch reached 2.7 standard deviations below the 100-day moving average.

mar28post1

 

The backtest of the two stocks shows that over the past 3-years 7-signals were generated with a stretch of 2.7 standard deviations for an entry criteria, and a take profit or stop loss when the ratio (the price of HAL / TS) reverted back to 1-standard deviation below the 100-day moving average.

The results were extremely impressive. The pair has a winning percentage of 100%.  The profit per trade is slightly more than $600.  The overall profit on the strategy over the 3-year period is $4,200, and the average correlation of the returns of the two shares is approximately 88%.

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The trading signal section will describe the number of shares that need to be transacted if you use $10K on each side of the trade.  You would need to purchase 208 shares of HAL at approximately $48.02 and short sell 297 shares of TS at approximately $33.57.  The ratio is approximately 1.49.

mar28post4

The chart of the pair shows that the ratio (lower right) tumbled to the low end of the distribution, which moved in tandem with the spread.

By looking for public companies that are in the same business, you can back-test hundreds of pairs to determine which stock pairs you want to monitor.  Your market neutral trading strategy should perform well in all market conditions as the impetus to take a position is not based on changes in the major stock indices.

Contact us to start your 30-day free trial of Pairtrade Finder software, the perfect software tool designed to help you easily and quickly find high probability securities pairs to trade.

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Why Pair Trading Can Perform Well in All Market Environments

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Pair trading is a form of market neutral investing were the risks that you take are based on the performance of one stock relative to another. The benefits of this type of trading technique is that the returns you receive are uncorrelated to the performance of the broader markets, which means that you can generate robust results in all types of market environments.

Hedge funds are very active pair traders, and whether they call their strategy long/short or statistical arbitrage, what they are doing is purchasing one stock and simultaneously selling short another stock.  So, if you are interested in trading like a hedge fund, a pair trading strategy is one that is easy for you to employ.

If you are asking why does pair trading work, the answer is that the markets can be inefficient for small periods, providing a pair trading opportunity.  Generally, companies within the same sector move in tandem with one another, but on occasion, the correlation can break down, giving you an opportunity to take advantage of this mispricing.

You can measure the relative value of one stock to another by the ratio which is stock A, divided by stock B.  This ratio, generally trades in a tight range, but when the correlation between the two stocks breaks down, the ratio will move to the outer end of the historical distribution generating a signal that you can back-test using Pair Trade Finder.

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By looking for public companies that are in the same business, you can back-test hundreds of pairs to determine which stock pairs you want to monitor.  Your market neutral trading strategy will perform well in all market conditions as the impetus to take a position is not based on changes in the major stock indices.

Contact us to start your 30-day free trial of Pairtrade Finder software, the perfect software tool designed to help you easily and quickly find high probability securities pairs to trade.

 

Wishing you consistent profitability,

Pairtrade Finder

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15 Trading Tips for Trading Equities Pairs with Pairtrade Finder’s Stock Trading Software

Tip # 4 – Review The Correlation Chart


Investopedia defines “correlation” as a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management. Correlation is computed into what is known as the correlation coefficient, which has value that must fall between -1 and 1.

A perfect positive correlation means that the correlation coefficient is exactly 1. This implies that as one security moves, either up or down, the other security moves in lockstep, in the same direction. A perfect negative correlation means that two assets move in opposite directions, while a zero correlation implies no relationship at all.

But note that correlation is not causation – ie rising ice cream sales does not necessarily increase the number of shark attacks (see figure below).

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