Monthly Archives: February 2017

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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:

gas

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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:

Fish swimming

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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