five40
23 posts
msg #56632
- Ignore five40
modified |
11/9/2007 4:05:29 PM
I'd like to test a strategy to buy QQQQ and QID at the open of the day. Use tight stop loss on each (maybe .25 to .50 cents) and a small profit stop of say $1.00 to $2.00.
Next day, buy one or both that got stopped out day before. Or neither if both are still held.
Can someone help me write that in a backtest filter?
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guru_trader
485 posts
msg #56761
- Ignore guru_trader |
11/14/2007 11:30:00 PM
Sounds like this strategy would work well in a bull market; I wonder about a bear market. Also, to tweak those entry and exit stops, I'd run your symbols through TRO's statistics filters ... find out the historical performance range of your symbols. I'm reworking my own statistics filters and will run those symbols through mine ... hopefully, I'll be able to post results soon.
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five40
23 posts
msg #56762
- Ignore five40
modified |
11/14/2007 11:44:38 PM
If it works at all, it should do just as well in bull or bear.
Are you familair with those symbols Guru_trader? They are both ETF's for the Nasdaq 100. QQQQ is long and has been around forever, QID is a newer ETF that is short.
For guys like me that trade IRA accounts, the only way to short is to use the "inverse ETF's".
So the idea I want to test is:
Buy the LONG and SHORT ETF's for the same index at the same time. Stop out of one, take profit on the other. Next day, do it again.
I can't figure out how to backtest this is stockfetcher.
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roheba
20 posts
msg #56779
- Ignore roheba |
11/15/2007 6:14:23 PM
Keep in mind that QID is a "twofer". It moves inversely at 2 times the move of the QQQQs.
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nikoschopen
2,824 posts
msg #56783
- Ignore nikoschopen |
11/15/2007 8:29:13 PM
Buy the LONG and SHORT ETF's for the same index at the same time. Stop out of one, take profit on the other. Next day, do it again.
Arb/spread trading is a tricky biz. Although It sounds simple on paper, you really must know ure craft. You might want to check out this thread on EliteTrader forum to gain others' insight: Pairs Trading Strategy Model
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nikoschopen
2,824 posts
msg #56786
- Ignore nikoschopen |
11/15/2007 10:40:33 PM
This is from the same EliteTrader thread:
Pair trading, also known as statistical arbitrage or spread trading, is a strategy that allows the trader to capture anomalies, relative strength or even fundamental differences on two stocks while maintaining a market neutral position. This powerful trading strategy once used only by large institutional investors and hedge funds has been adapted for implementation in your taxable trading accounts. Market neutrality has never been more important, as it allows the trader to capture profits in up, down, or sideways markets while giving you the freedom from having to predict the direction of the overall market.
With pair trading you’re not trading the individual stocks based on their direction, but rather trading the difference between the two stock prices. This is called trading the spread differential and you’ll quickly learn that this key difference makes this type of strategy very different from other trading methodologies. In pair trading you’ll move away from the dependency of following the market’s direction and instead focus on trading the chart of the difference of the two correlated stocks.
With pair trading two highly correlated stocks are traded simultaneously, one long and one short. A trade is initiated when the difference between the two stocks prices, or the Spread Difference (SD), moves statistically too far apart based on historical correlation and volatility. Pair trading is based on mean reversion, meaning two stocks that normally trade in the same direction become temporarily uncorrelated and eventually revert back to the mean .
In this example of Exxon (XOM) and Chevron (CVX), the two stocks move $23 from the high to low in 2006. There were numerous 10% pullbacks and rallys where guessing market direction would have been very difficult. But the Spread Difference between them only moves $5, and continuously reverts back to its mean!!
(Source: WWW.DAYTRADEPAIRS.COM)
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welliott111
98 posts
msg #56800
- Ignore welliott111 |
11/16/2007 3:58:08 PM
"Pair trading is based on mean reversion, meaning two stocks that normally trade in the same direction become temporarily uncorrelated and eventually revert back to the mean . "
I don't think five40 is talking about the same thing as Pair trading as in the above example. QQQQ and QID trade in OPPOSITE directions. The only problem with five40's idea might be on a "doji" day that could stop out on both sides.Seems to be a profitable system overall IMO.
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five40
23 posts
msg #56810
- Ignore five40 |
11/17/2007 12:48:31 AM
Niko- Thanks, that pair trading is very interesting. I am going to read some more on it. Good stuff, thanks.
welliott111 - Yes! I think it *MAY* be a system that would work. I cannot get it to back test though. Any help?
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guru_trader
485 posts
msg #56813
- Ignore guru_trader
modified |
11/17/2007 6:07:50 AM
Re: "Use tight stop loss on each (maybe .25 to .50 cents) and a small profit stop of say $1.00 to $2.00."
This sounds like a strategy that can be better analyzed using software that handles intraday trading activity like TradeStation, MetaStock, etc. The problem with Stockfetcher is that we can only use the open, high, low and close values, but we don't know whether the low (stop loss) occured before or after the high (stop profit). However, we can still do some statistical analyses.
Note: Additionally, for this kind of trading, I would recommend looking into TRO's Buy Zone Filters.
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fokane
74 posts
msg #56814
- Ignore fokane |
11/17/2007 6:59:09 AM
Here's an article on pairs trading:
http://www.investopedia.com/articles/trading/04/090804.asp
I looked into pairs trading a while ago, paper traded a couple of oil stocks on the LSE but didnt work out for me :-)
I'd be interested if anyone has ever been successful with it with stocks rather than indices.
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