This is the first installment of a 3 part series on a pair trade I've called Gold Digger. It will, of course, feature the Market Rewind pairs analysis and optimization toolbox that I've profiled for the past 2 weeks and chronicle the evolution of the Gold Digger system.
There's been a lot interest in gold recently, mostly because of it's significant run up I suspect and a few readers have e-mailed me asking for a gold system in the spirit of my previous Dirty Dozen posts. This is a tangential response to those requests.
As I've mentioned before I don't like the way the gold ETF GLD tracks technically, much preferring NEM, which offers the added advantage of penny spreads on the options (GLD is nickels and dimes). While GLD typically trades almost twice the volume as NEM, it's my experience that NEM still tracks the pivots and my other indicators better than GLD, but that's just my view.
For today's post we'll focus on my oft-stated goal of developing a basket of systems to trade a small basket of ETFs. In this case we'll look at using a basket of pairs to trade a single stock -NEM, per the argument above.
The Rewind Matrix allows you to quickly create such a basket approach by simply loading our target NEM and any variety of potentially correlated or non-correlated stocks and ETFs. For our initial scan I've picked 8 of the usual suspects and run out the Matrix for both linearity and profits based strictly on Condition #2 (Z-score reversals) . . the most basic optimization option.
Looking at NEM in the #1 matrix slot and running down the matrix column we see the resultant linearity correlation of each of the 8 comparison ETFs.
Looking at NEM in the #1 matrix slot and running across the top row we see the resultant hypothetical P&L for each of the 8 comparison ETFs.
You can also check out the relative correlation & P&L performance of any of the other resultant pairs by simply clicking any cell on the live matrix.
A few of these pairs (such as UUP/KRE and UUP/SMH) look worthy of further exploration and we'll actually follow the money on this idea in depth next week.
The matrix is just an initial screening tool to help identify potentially high probability pairs. Tomorrow's look at the individual pair optimizer and it's toolbox should help us get a clearer picture of the actual risk exposure inherent in each pair.
There's been a lot interest in gold recently, mostly because of it's significant run up I suspect and a few readers have e-mailed me asking for a gold system in the spirit of my previous Dirty Dozen posts. This is a tangential response to those requests.
As I've mentioned before I don't like the way the gold ETF GLD tracks technically, much preferring NEM, which offers the added advantage of penny spreads on the options (GLD is nickels and dimes). While GLD typically trades almost twice the volume as NEM, it's my experience that NEM still tracks the pivots and my other indicators better than GLD, but that's just my view.
For today's post we'll focus on my oft-stated goal of developing a basket of systems to trade a small basket of ETFs. In this case we'll look at using a basket of pairs to trade a single stock -NEM, per the argument above.
The Rewind Matrix allows you to quickly create such a basket approach by simply loading our target NEM and any variety of potentially correlated or non-correlated stocks and ETFs. For our initial scan I've picked 8 of the usual suspects and run out the Matrix for both linearity and profits based strictly on Condition #2 (Z-score reversals) . . the most basic optimization option.
Looking at NEM in the #1 matrix slot and running down the matrix column we see the resultant linearity correlation of each of the 8 comparison ETFs.
Looking at NEM in the #1 matrix slot and running across the top row we see the resultant hypothetical P&L for each of the 8 comparison ETFs.
You can also check out the relative correlation & P&L performance of any of the other resultant pairs by simply clicking any cell on the live matrix.
A few of these pairs (such as UUP/KRE and UUP/SMH) look worthy of further exploration and we'll actually follow the money on this idea in depth next week.
The matrix is just an initial screening tool to help identify potentially high probability pairs. Tomorrow's look at the individual pair optimizer and it's toolbox should help us get a clearer picture of the actual risk exposure inherent in each pair.
3 comments:
"Looking at NEM in the #1 matrix slot and running down the matrix column we see the resultant linearity correlation of each of the 8 comparison ETFs.
Looking at NEM in the #1 matrix slot and running across the top row we see the resultant hypothetical P&L for each of the 8 comparison ETFs."
I'm trying to understand how to interpret the matrix, but it seems like the horizontal and vertical axis show the same data (e.g.: nem/dba shows +.94 on both planes). Is there a distinction here that I'm not seeing?
Thanks...
Ty,
You are correct. Thanks for the heads-up. The correct file has been posted as of 7:00 PM PST. Sorry for the error. .I got a little bit ahead of myself when I captured the original matrix image.
Note to readers:
As of 9/16 the original errored file has been deleted for sake of clarity.
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