This is a continuation of the UUP/Qs study with the goal of developing a basket of pairs to trade the UUP. The UUP, of course, is a not a high beta ETF, but when we compare the relative z-scores created by opposing UUP to a few other ETFs, we can actually produce a nice stream of gains with very controlled drawdown (and hence, risk management).
I've set the Linearity filter to (90%) and the quick scan reported here shows some of the UUP pairs candidates and their performance stats.
The Qs, SPY, NEM, DBV and EEM paired against the UPP all present respectable trading opportunities.
A couple caveats:
A couple caveats:
Daily volume in the DBV (double G10) can run less than 100K per day, although it picks up to +300K for occasional spurts, but the spreads are still only .02-.03, so I've included it for this study.
The FXF (Swiss Franc) almost makes the grade but it's volume is typically in the 50K range so liquidity can be a problem. Surprisingly, bid/ask spreads are only .03.
The various 90% basket components do have different lookback periods, which is also helpful in gauging relative momentum of the UUP.For the sake of space I've only shown 2 of the basket full pairs analysis, but the matrix stats give a good indication of the likely odds of using this approach.
Keith had a comment on Greenfaucet yesterday lamenting the poor performance of the UUP/Qs pair going back to 2 years. I'll reiterate my answer to him: previously I've mentioned the need to look at the position of the equity curve (chart D) relative to the slope of the R2. Strictly as a risk management tool, our tactical approach to trading each pair involves NOT trading when the equity curve falls below the R2 slope. This is one of the reasons for using a pair basket as our goal is to identify differently phased pair cycles, some of whose equity curves may be above the R2, while some may be below. We only want to execute trades in those above the R2 and hold back on the others until such time as their performance improves or, failing that, remove them from the basket and identify other pair candidates whose equity curves are above R2.
Keith had a comment on Greenfaucet yesterday lamenting the poor performance of the UUP/Qs pair going back to 2 years. I'll reiterate my answer to him: previously I've mentioned the need to look at the position of the equity curve (chart D) relative to the slope of the R2. Strictly as a risk management tool, our tactical approach to trading each pair involves NOT trading when the equity curve falls below the R2 slope. This is one of the reasons for using a pair basket as our goal is to identify differently phased pair cycles, some of whose equity curves may be above the R2, while some may be below. We only want to execute trades in those above the R2 and hold back on the others until such time as their performance improves or, failing that, remove them from the basket and identify other pair candidates whose equity curves are above R2. This trading selectivty is, in fact, the foundation of the adaptive pair trading strategy we're trying to capture.
1 comment:
You are relentless, sir. To your point re: Mr. Keith... these relationships can be fleeting. That's why this back tester only goes back six months as it is. Nevertheless, I personally find a strong underpinning rational/ relationship thesis critical to my decision as to whether or not to trade the pair. Sincerely, Jeff
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