March 2009
1 post
Dark Liquidity Pools
Noting this down as a reminder - this is the twin of algo. trading. need to read up on this.
February 2009
3 posts
Market Neutral Vs. Risk Free
Market-neutral strategy: A trading strategy that derives its returns from the relationship between the performance of its long position and the performance of its short positions, regardless of whether this relationship is done on the security or portfolio level.
In a perfectly market-neutral portfolio, holding all other factors constant, the performance of the long portfolio and the performance...
Duration and Data
One of the key challenges in pair spotting is the duration for analysis - how far back do you need to look out to extract pair behavior - finally it boils down to two things: identify the pair, and then look for divergence. We need to understand that without comprehensive tools that can identify divergence signals, we’ll end up ‘guessing pairs’ at some level, which is just...
Its the same thing...
Wanted to note this down before I forget.
One of the main reasons I got interested in Pairs trading is the fact that you are not taking a directional bet in the market, instead, you are taking a bet on the relative performance of two instruments - so basically, we are saying, from where we are now, instrument A will outperform instrument B, since historically they have behaved in a particular way...
January 2009
9 posts
Understanding Standard Deviation
Since at this point, standard deviation is an important part of our pairspotting analysis, I wanted to have a better understanding of this measure, and got to this link.
Random Pairspotting..
Since I have ‘gained’ the skills of using excel to calculate standard deviations etc., I thought it would be a good idea to do some random pairspotting and figure out how it works in the market. This is an exercise i started, since ganapathy’s book is too heavy, and turns out i need much more time for the book than what i had originally estimated.
The KRChoksey folks have done...
Am Not Convinced...
One view I have of the markets is (and is shared by many, many people) is that one cannot, just cannot apply mathematics to a sequence of numbers that are generated based on people’s perceptions (buy and sell). I am not saying that the numbers are random: I am only saying that mathematics cannot be used to predict anything about the markets. This, even if you exclude black swan events.
So,...
Complicated!
Just started reading Ganapathy Vidyamoorthy’s book on Pairs trading .. This is a really, really complicated subject !
Market Neutral..
Wanted to jot this down before I forget: the most important reason why I am exploring pairs, is the fact that pair trading strategies are “market neutral”. A good article by Douglas Ehrman explains this with an example:
Many traders think of a pair as a “spread” trade, but this comparison is not quite accurate. A spread trade creates either net long or net short exposure, but a...
Queries
Even before I get into the “How do we implement this strategy” part, I thought it will be a good idea to pen down my questions at this point. I know some of them might have obvious answers and some would just become redundant, but here goes:
1. Prices constrained by Contracts: The way I understand futures, there are set futures for a given stock at set prices, typically expiring end...
NSE Pair Trading Example
There can be many types of pairs: two stocks, one stock and a group of stocks, one stock and an index, a group of stocks and an index and so on. To understand the concept of mean reversion and the instruments required to execute a pairs trade on NSE, we’ll start with two stocks: Wipro and Infosys.
According to a KRChoksey Report, the recommended strategy is to long infosys and short wipro....
Pairs Trading - Level 0 understanding
Luminous Logic provides an example and a very very high level overview of pairs trading. The basic idea is presented below:
1. Find a pair of stocks (or ETFs) whose prices tend to move together.
2. If the price movements are indeed highly correlated, then on most days the price per share of Stock A divided by the price per share of Stock B should come out to be about the same number, within a...
What is Pair Spotting?
Few days back, my friend introduced me to Pairs Trading. Strategies are formulated, based on the idea that the price relationship between two related instruments tends to fluctuate around its average in the short term, while remaining stable over the long term.
I plan to study pairs in more depth, and try and do actual trades based on what I find. I plan to keep my notes in this blog.
Welcome to...