Rajeev Seth's  Instablog

 Stock Pairs Trader System Description

BeatIndex’s stock pairs trading system screens for matched stock pairs to go long and short by doing a daily proprietary quantitative analysis of all stocks in the S&P500 Index

It may find a new entry trading signal consisting of two legs: a buy stock order and a simultaneous sell short stock order on a matching stock in the S&P 500. This computer screening generates an average of one or two paired trades per week. This gives you plenty of time to manually implement the two stock transactions in your brokerage, buying one stock and selling short the other when opening a new pair; or selling one stock and buying back a shorted stock when closing an open pair.

Our trading signal consists of simple instructions of the kind:

Buy 1314 shares of TER, while
SIMULTANEOUSLY selling short 1000 shares of INTC

You need to implement this trading signal by buying and selling both legs of the matched stock pair. You may execute the paired trading signal within a few hours of the system issuing the signal. It is very important to implement the two stock trades together, preferably on the same day, so as to derive the full benefit of the arbitrage potential in the stock pairing.

We will also provide you the closing signal on the trade pair, usually within a few weeks. Again, you must get out of the two legs together when your receive our exit signal.

Since there is plenty of time to implement the two trades, you can go about your business or hobbies without being glued to the financial markets. All you need to be able to do short selling is to open a margin account with your discount stock brokerage.

Or, to keep things really simple, automatic trading can be done in your brokerage accounts if you choose Autotrade in Collective2’s systems. Sign up for your free trial here.

Real example using our very first paired trade

Let me show you visually how we deal with paired trades, with the story of our very first paired trade on TER and INTC entered on 7/22/10. In just 5 days, this pair’s P&L is shown here

 Graphically, the profit has ramped up nicely in 4 trading days to $535

Since, in today’s news after markets closed, TER is up over 7%, it is very likely that this pair will ramp higher in profit on Thu, July 29, 2010.

The picture below shows that when we decided to enter this paired trade, our proprietary signal Value (shown on the Y-axis) on this pair was at the bottom extreme of an oscillating wave. It has since then been closing into the zero line on the X-axis. We will close the trade out as soon as it hits the zero-crossing on the X-axis.

Here's the latest from the BeatIndex’s Trading Signals Alert Service which entered one new paired stock trade today July 28, 2010:

 Sign up for your free trial here.

You can check out more performance metrics on this system, when you sign up for your free trial here.