CloroxCowboy

Paired Trades: Short Nalco Holding, Long Met-Pro

Thanks for clarifying, I see what you're trying to do now. This is not the same type of pairs trading I do so I wanted to fully understand your analysis. I think it's just a difference between technical vs fundamental valuations.

For example, my style would be to find a pair where the price ratio is relatively stationary (highly cointegrated) over several years, and enter trades at several standard deviations from the mean. I would exit on a return to the mean, rinse, and repeat. Basically I just look for statistical "tails" but rarely use fundamentals or events when I value my trades. In fact, I try to specifically trade pairs with very little recent news that have slowly drifted apart (for no apparent reason) and wait for a quick rebound to the "correct" prices.

Your method seems to be different than mine, and I can see that it would require more in-depth fundamental research to trade this way. Don't get me wrong though, I think both methods can be successful. I am definitely looking forward to reading about your future trades and learning more about this style. Good luck and thanks for the reply!

Paired Trades: Short Nalco Holding, Long Met-Pro

Typo above: should be "I tend more to the technical..."

Paired Trades: Short Nalco Holding, Long Met-Pro

Alan,

Nice to see that someone is coming out with a series on pairs trading. I have a question regarding this particular trade. Financials aside, when I look at the price ratio chart you attached it seems that the main portion of this correction might have happened already. My question is: Are you doing any analysis on the quantitative side, looking for favorable co-integration characteristics in these pairs, etc? I tend more to the techinal in my pairs trades, evaluating the movements of price ratio more than company financials, so I'm very interested to see how a strategy based largely on fundamentals (that is just my assumption from the article) will go.