Friday, September 04, 2009

DIG FAS - A Big Pair

In a continuation of yesterday's introduction of the REWIND pairs trader. . . here's a turbo version of the XLE XLF pair trade using the 3x bull energy versus the 3x financials. This trade is what I call buying risk and one metric that has yet to be clearly defined is the max daily drawdown such a pairing might incur. We're working on it at the REWIND development center.
Clearly the results are stunning and with a rolling correlation of 100% the profit potential is there for those willing to stick their neck out a bit.
For backtesting I've turned on condition #2, which looks for active z-score reversals and I've optimized for both P&L linearity and profits, although with this testing environment you can choose Linearity of P&L or Cumulative Profits or Linearity x Cum Profits.
Note in the Neutral Trade window that you have to trade 2.5 shares of DIG for every share of FAS to create a balanced capitalization.
For those attempting this trade I would first recommend reviewing an archived post that argued for certain visual aids to help you keep up your enthusiasm in high stress environments.
Keep in mind that these results are reflective of daily bar activity. Those of you who have been with me for a while know my real interest is more on daytrading and the next iteration of this pairs study would have to focus on a 5 minute bar version. I'll keep you posted.


Kristianson said...

DIG is a 2x Energy vs FAS 3x financial. If you try with ERX (3x energy vs FAX) you will get 190% rtrn (same parameters). With DIG (2x vs UYG 2x financial) I get 114% rtrn with same parameters.

bzbtrader said...

Oooops! You are are exactly right. Being old and feeble of mind I need all the help I can get so your clarification is appreciated.