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Pair of day: ACGL-AFG

05/18/2012

The price ratio of stocks ACGL (Arch Capital Group Ltd.) and AFG (American Financial Group Inc.) is currently at the local extremes above its average. The correlation of these two stocks is very high (long term yearly correlation 81.86%, short term monthly correlation 81.93%) and thus we might assume that the price ratio of both stocks might return to its average. To prosper from this potential setup, we will track the trade of short ACGL from its price 38.46 and long AFG from its price 37.85. Overall historical analysis speaks in favor for the mean reversion of this pair. Over the past 36 months there were 36 trades based on the same setup; 24 trades were hypothetically profitable (66.67% profit ratio) with an average profit per trade of 46.76 USD (based on 10 000 investment to the pair with 50% margin). The largest losing trade was -490.48 USD and the largest winning trade 446.24 USD. Over the backtested period of 36 months, the pair performed an overall drawdown of 20.3% and a gain of 16.83%.
Click on the title of this post to display the full equity line of backtested performance and detailed statistics of the backtest. Please note - this is NOT a recommendation for opening the trade. Our analysis is for statistical purposes only and it is based on past hypothetical performance of the pair only. We do not research the pairs for upcoming events such as earnings, mergers etc. that would be necessary in the case of live trading.

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Pair of day: ASNA-SSI

05/17/2012

The price ratio of stocks ASNA (Dress Barn Inc.) and SSI (Stage Stores Inc.) is currently at the local extremes below its average. The correlation of these two stocks is very high (long term yearly correlation 0%, short term monthly correlation 10.4%) and thus we might assume that the price ratio of both stocks might return to its average. To prosper from this potential setup, we will track the trade of long ASNA from its price 19.21 and short SSI from its price 15.97. Overall historical analysis speaks in favor for the mean reversion of this pair. Over the past 11 months there were 38 trades based on the same setup; 29 trades were hypothetically profitable (76.32% profit ratio) with an average profit per trade of 362.78 USD (based on 10 000 investment to the pair with 50% margin). The largest losing trade was -900.16 USD and the largest winning trade 1370.61 USD. Over the backtested period of 11 months, the pair performed an overall drawdown of 11.76% and a gain of 137.86%.
Click on the title of this post to display the full equity line of backtested performance and detailed statistics of the backtest. Please note - this is NOT a recommendation for opening the trade. Our analysis is for statistical purposes only and it is based on past hypothetical performance of the pair only. We do not research the pairs for upcoming events such as earnings, mergers etc. that would be necessary in the case of live trading.

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Pair of day: POT-SYT

05/16/2012

The price ratio of stocks POT (Potash Corp. of Saskatchewan, Inc.) and SYT (Syngenta AG) is currently at the local extremes below its average. The correlation of these two stocks is very high (long term yearly correlation 33.96%, short term monthly correlation 64.7%) and thus we might assume that the price ratio of both stocks might return to its average. To prosper from this potential setup, we will track the trade of long POT from its price 39.52 and short SYT from its price 65.71. Overall historical analysis speaks in favor for the mean reversion of this pair. Over the past 36 months there were 36 trades based on the same setup; 24 trades were hypothetically profitable (66.67% profit ratio) with an average profit per trade of 113.43 USD (based on 10 000 investment to the pair with 50% margin). The largest losing trade was -627.85 USD and the largest winning trade 1084.67 USD. Over the backtested period of 36 months, the pair performed an overall drawdown of 23.42% and a gain of 40.84%.
Click on the title of this post to display the full equity line of backtested performance and detailed statistics of the backtest. Please note - this is NOT a recommendation for opening the trade. Our analysis is for statistical purposes only and it is based on past hypothetical performance of the pair only. We do not research the pairs for upcoming events such as earnings, mergers etc. that would be necessary in the case of live trading.

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We feel that the biggest enemy when pair trading is often the trader himself. One really needs a systematic approach and patience to succeed in pair trading. That is why we set several simulated portfolios that are updated on a regular daily basis.
The portfolios are set with different entry criteria to demonstrate how the selection can influence the overall results. Some portfolios were built using only highly correlated pairs, others using different criteria. You can now study the results yourself and decide what criteria might work best for you.
Please note, that the results are only illustrative and trades are not executed live. Results are built using EOD data and do not consider liquidity factor or commissions.
You can read more about PairsLog’s autotraders in our article Automated portfolios (autotraders).