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vx2008


Total Posts: 11
Joined: Jan 2016
 
Posted: 2017-10-11 03:19
I want to trade two stocks like this: long stock A and short stock B meanwhile;

I have back test for this like this: take one day for example, this day's return is "closeA/openA-closeB/openB";

I find this back test is well,but the back test is based on that stock A and stock B were traded by the same money; in the fact I can't make this exactly, especially when prices of them is much different, such as price of A and B are 5563 and 7526.

How shall I handle this problem, especially when I don't want to trade much money at the very beginning? or how shall I modify back test method on "closeA/openA-closeB/openB";?

ronin


Total Posts: 216
Joined: May 2006
 
Posted: 2017-10-11 14:33
It sounds like you are trying to be a bit too clever.

Try modelling the actual trades that you would do. E.g. buy 7 shares of A at today's open, sell 5 shares of B at today's open, sell 7 shares of A at today's close, buy 5 shares of B at today's close.

Then add some slippage and short interest.

But I would be surprised if you managed to get this to work. Open to close is not a meaningful time horizon.

"People say nothing's impossible, but I do nothing every day" --Winnie The Pooh

vx2008


Total Posts: 11
Joined: Jan 2016
 
Posted: 2017-10-12 02:31
thanks for your reply;

"Open to close is not a meaningful time horizon", I mean one day's close and one days open and I would hold the pair trade for whole day from open to close; so it is a meaningful time horizon;

"Try modelling the actual trades that you would do. E.g. buy 7 shares of A at today's open, sell 5 shares of B at today's open, sell 7 shares of A at today's close, buy 5 shares of B at today's close"; if this, 7 and 5 will changed frequently at the testing procedure because their price would change; so ''7'' and ''5'' and other number would seem not meaningful.

ronin


Total Posts: 216
Joined: May 2006
 
Posted: 2017-10-12 10:28
> I would hold the pair trade for whole day from open to close

I got that. The question is why you would hold your pair from open to close.

Pairs usually work either on very short time scales (driven by portfolio rebalancing), or on very long tme scales (driven by fundamentals). I have never seen a reason why they would work from open to close.

> 7 and 5 will changed frequently at the testing procedure because their price would change; so ''7'' and ''5'' and other number would seem not meaningful.

Unless you are looking at penny shares, the daily standard deviation of each share should be around 1%, and annual standard deviation around 15-20%. So you may have to review the ratios every year or two, but there is no need to do it day to day.



"People say nothing's impossible, but I do nothing every day" --Winnie The Pooh

vx2008


Total Posts: 11
Joined: Jan 2016
 
Posted: 2017-10-16 02:45
I got it; thank you
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