Correlated Stock Pair Trade of the Month: April 2020

Eastman Chemical Company (EMN:NYSE) vs. Element Solutions Inc. (ESI:NYSE)

$1,210 in Four Market Days, 30.3% Return on Margin.  Best correlated stock pair trade for the month of April 2020!

ESM and ESI are a correlated stock pair that we selected in late March for inclusion in our latest April Vintage of the Top 30 U.S. Equities Pairs.

Watch our video:

correlated stock pair

Backtest Results of this Correlated Stock Pair:

In backtesting over the three years prior to 1 April 2020, cointegrated and correlated stock pair EMN/ESL delivered 8 closed trades, an 88% win rate, an average net profit per trade of $494, and over $4,300 in total profits:

correlated stock pair

Actual Trading Result

In actual trading, EMN/ESI called an Entry Signal EOD on 7 April 2020 at a 2.84sd.  The trade exited on 14 April 2020, four market days later at a 0.12sd, delivering a $1,210 Net Profit and a 30.3% return on margin!  (assumes $10,000/leg trade size and 5:1 CFD margin).

PairTrade Finder®’s Top 30 U.S. Equities Pairs

We analyse over 1,800 U.S. equities to find you the best stock pairs for you to trade.  We update this analysis on a quarterly basis to ensure these pairs stay fresh and their correlations and cointegrations strong to offer you the highest-probability setups. All pairs must meet strict profitability and robustness measures as follows:

  • USA Exchange-traded (NYSE/NASDAQ/AMEX): > than $2 bln mkt cap (most much larger), > $2 million/day of average daily traded volume($), easy-to-borrow
  • Similar fundamentals: same national market, same sector, usually same industry sub group. Preference for beta-similar, market-cap-similar pairs
  • Backtested with a 2.7 standard deviation Entry Stretch, 1.0 standard deviation Exit Stretch on the Core Ratio of the pair’s share prices
  • Three-year backtest lookback period, 63 day (one trading quarter) Standard Deviation, Ratio and Stretch lookback settings
  • COINTEGRATION: We use the Augmented Dicky Fuller test for co-integration and select only pairs with a p-value of 0.10 or less over the 3 year period
  • CORRELATION: of minimum 50%, preferably higher. Lower correlation can be tolerated if pair is strongly cointegrated and scores highly on all other criteria
  • Minimum Average Profit per Trade of $300, preferably $400+.
  • Compound Annual Growth Rate of Net Profits for each pair preferably in excess of Maximum Drawdown % i.e. positive reward/risk. Maximum historic drawdown < 20%, preferably <15%  (before leverage)
  • Win Rate at least 70%
  • Maximum Days in Trade of 60 days. This setting represents our time stop. Average days per trade is around 12-15 days

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Happy trading.

Geoff, Paul & The PairTrade Finder® Team

NB: The Top 30 example equities pairs in PairTrade Finder® PRO and the trading signals generated therefrom are provided for informational and educational purposes only.  They should not be construed as personalised investment advice. It should not be assumed that trading using the parameters demonstrated by the Software will be profitable and will not result in losses. Please see our full Terms & Disclaimer here.

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