Wednesday, September 23, 2009

Qs/UUP - Part 2

This is a postscript to Tuesday's Qs/UUP pairs trade in response to a number of reader e-mails suggesting that simply using Ticker A (Qs) z-score reversals should produce a similar or even enhanced performance to the Qs/UUP pair.
Here's the result of such a test run and I think we can conclude that using the backdrop of the UUP does indeed produce superior returns to simple Ticker A boundary reversals. The other improvements that we see by using a Qs pairs approach is a reduced frequency of trades and a reduced drawdown.
The optimized lookback on the Ticker A approach is 4 days while the pairs approach lookback is 9 days, suggesting that using the pairs approach allows the positions to "breath" a little more, avoiding premature exits (a problem I've lamented previously).
Clearly the net return using a pairs approach is considerably greater than a Ticker A approach and I reiterate my argument that using a basket of ETF pairs to trade a single ETF can minimize risk (my primary concern) and drawdown while generating a consistent revenue stream .
Finally, keep in mind that all of the REWIND pairs charts are based on a 6-month analysis period, so the % gains and linearity correlations shown are for a corresponding 6 time frame only.


Kristianson said...

It is interesting to also watch the Z-Score level change in real time (intra day) as sometimes you have strong moves during the day that triggers a setup. An example was yesterday UUP/QQQQ pair, after the fed announcement the market soared pushing QQQQ to new highs and UUP to new lows and Z-score > -1.7 (in the setup I was watching the z-score bands are @ +1.7 and -1.7). It closed later in the day @ -0.26.

bzbtrader said...

Good Point! My longer term goal in developing these baskets of pairs to to daytrade them through auto-trade algorithms on 10-60 minute bars. Some initial runs I've conducted on a NEM and Qs basket are extremely encouraging so if you a daytrader you've made a keen observation. Generally, the shorter term optimized daily lookback (N) values provide the best daytrading candidates.