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.

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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.

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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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TRADE LIKE A HEDGE FUND – Harness the Power Of Technology to Gain Market Edge in One Hour per Day

Presentation by Geoffrey Hossie of Pairtrade Finder to the Marbella Business Institute, 24 February 2017.

An introduction to Pair Trading and Why It Matters To You.

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

Tip # 3 – Analyze Your RSI Chart


Technical analyst J. Welles Wilder created the Relative Strength Index (RSI) as a tool to measure the strength or weakness of the closing price series of a security over time.  It is a measure of both velocity (speed!) and magnitude (distance travelled) of price changes and can identify stocks that are either overbought or oversold.

The Relative Strength Index is calculated as RSI = 100 – 100/(1+RS). RS (Relative Strength) is usually calculated as the exponential moving average of daily gains/exponential moving average of daily losses during a defined time period. The standard time frame is 14 days. If losses over that time frame are close to 0, then RS approaches infinity, and the RSI approaches a 100 reading (moonshot!).

If you don’t follow the maths, don’t worry.  What you need to know is that when the RSI is exceeding 70 or below 30, then the security in question is entering “overbought” or “oversold” conditions, meaning the price has moved very fast and covered a lot of ground in a certain direction, and may be due a breather.  Hence, the RSI is a momentum indicator (oscillator) that we use to help us identify turning points in price action.

For the purposes of pair trading, we look at the RSI of the Price Ratio of security A/security B as opposed to the price action of an individual security.  It is a closing price series over time and hence the RSI can be applied.

Pay Attention to the Foot on the Gas Pedal:

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

Tip #2 – Price Ratio Analysis


Pair trading often succeeds or fails based on price ratio analysis, which is the core of the system. The maths are simple: in two correlated stocks what is the ratio of stock A to stock B (price A/price B)? The closer the stocks are in price, the closer the ratio will be to 1. For example, if stock A is trading at $55/share and stock B is at $58/share, the price ratio is 0.95. 

Watch For Changes in the Current of the Stream:

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Correlated stocks, and to a great extent co-integrated stocks, over time tend to move up and down together like two fish swimming side-by-side. That’s a logical outcome of the mathematical relationship, which reflects the fundamental reality. The same economic factors, such as regulatory environment, macroeconomic trends, overall customer demand etc. affect both stocks similarly. Using historical data and pair trading software, a trader can establish a solid baseline for analysis. The longer the trading history of the pair, the firmer the backtested trading parameters derived from past price ratio deviations may be. 

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

Tip #1 – Determine Why the Trade Signals for a Pair Trade Were Generated


So things are going well in your quest become a profitable equity pairs trader.  As a result of following our 3-Hour, 11-Lecture Pair Trading Video Course, you have:

  1. Installed Pairtrade Finder v3.27 on your PC and ensured you have a clean internet connection to access Yahoo! Finance data and keep your My Watchlist pairs updated both EOD and intraday;
  2. Created groups of equities that are in the same or similar industries and sectors, have market capitalizations of at least $1 billion, and have a daily traded share value of at least $5 million.  You can use our pre-loaded Excel sheets for this task, and copy and paste the tickers for each pre-filtered industry grouping into the Create Group entry screen;
  3. Generated the results of your backtests using your preferred parameters (we use an Entry stretch of 2.7 sd and an Exit stretch of 1.0 sd and always backtest over three years or more, looking for at least 8-10 trades in the pair history, and initially use only one Entry Layer);
  4. Screened the backtest results by your preferred parameters (we like to see at least $500 avg profit per trade using $10,000 per leg, at least 80% winning trades, and any largest losing trade that is no more than 50% of the avg winning trade);
  5. Saved the resulting pairs to My Watchlist so that they can now be updated both EOD and intraday to generate Trading Signals;
  6. Configured your email address into Pairtrade Finder to allow you to receive Trading Signals by Email if you desire.

Below is a sample backtest from a good-looking pair EPAM/MANH (EPAM Systems, Inc. and Manhattan Associates, Inc.):

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