PAIR TRADING SYSTEMS..!!

[Nifty Technicals]

Hi Guys..!!

Does anybody have any idea on "Pair Trading" strategies..??

 

[moretodo]

Hi Guys..!!

Does anybody have any idea on "Pair Trading" strategies..??

The strategy of matching a long position with a short position in two stocks of the same sector. This creates a hedge against the sector and the overall market that the two stocks are in. The hedge created is essentially a bet that you are placing on the two stocks; the stock you are long in versus the stock you are short in.

 

[Nifty Technicals]

@moretodo
thanks for the reply..!!
but can you be more specific as to how a good strategy/model can be developed..?

I have few questions on this...

1. Which approach is better, viz Fundamental methods/ Technical Chart analysis/ Quant techniques /any other...?
2. How to pick stocks for pairs?
3. How to check/test if their prices are co-related?
4. How to calculate/judge the relative mispricing (which one is over valued / undervalued)?
5. How to decide on the threshold levels for entering long & short positions?
6. How to decide on the quantities?
   
7. How to decide targets & Stoplosses..?
8. Are these strategies really market neutral..if no, then can there be one?
9. Is it only implemented through FUTURES only..or OPTIONS are used as well..?
10. Finally, HOW MUCH RETURN can these strategies deliver on an average or what Return is a respectable one?

 

[moretodo]

@moretodo
thanks for the reply..!!
but can you be more specific as to how a good strategy/model can be developed..?

I have few questions on this...

1. Which approach is better, viz Fundamental methods/ Technical Chart analysis/ Quant techniques /any other...?
2. How to pick stocks for pairs?
3. How to check/test if their prices are co-related?
4. How to calculate/judge the relative mispricing (which one is over valued / undervalued)?
5. How to decide on the threshold levels for entering long & short positions?
6. How to decide on the quantities?
   
7. How to decide targets & Stoplosses..?
8. Are these strategies really market neutral..if no, then can there be one?
9. Is it only implemented through FUTURES only..or OPTIONS are used as well..?
10. Finally, HOW MUCH RETURN can these strategies deliver on an average or what Return is a respectable one?

http://www.marketwatch.com/story/why-i-wont-teach-pair-trading-to-my-students-2012-10-01

http://stat.wharton.upenn.edu/~steele/Courses/434/434Context/PairsTrading/PairsTradingGGR.pdf

1. fundamental and chart both

2. look for stocks from the same sector that are highly correlated statistically from past market data. eg GM and Ford

3. Using statistical softwares. Some of them ccome with automated computational capibilities.

8. yes

9. generally options

 

[Nifty Technicals]

Attached are two pdf files on the strategy..

Views on the subject are welcome..!!