Hey all,
Today is going to be the first of a three part series discussing pair trading as a hedging strategy.
For those of you unfamiliar with the concept of pair trading, I will take some time to describe it. Essentially, pair trading involves tracking two equities, or other financial instruments over time, and how they move in relation to each other. For example, if we pick the two equities Coke (KO) and Pepsi (PEP) , we want to find an average difference in price between the two. Now on the programming side, which I will go into more in later parts of this series, we can read in a file containing the data for Coke's Stock Price and Pepsi's Stock Price and compute an average difference in price. Once we have this average difference, for clarities sake, lets assume the average difference in stock price is KO is on average $1 dollar more expensive then PEP. With the pair trading hedge strategy, anytime Coke moved more than $1 more expensive than Pepsi, we would short a predetermined amount of KO shares and buy a predetermined amount of PEP shares. The reasoning for this is that we expect these two stock prices to converge back to their average difference in price.
Come back for part two of this series, where I will demonstrate the coding techniques necessary to compute the price differences we need. In part three, I will demonstrate a successful pair trade using real life numbers and stocks!
If you are thirsty for more information on pair trading, click here!
Thursday, February 24, 2011
Wednesday, February 23, 2011
First Post!
Hello Everyone!
This is going to be a collaborative space to discuss profitable trading strategies. We will discuss a wide range of products, with a large emphasis on hedging strategies and advanced option strategies. I will try to post a relevant post per day describing the current state of the market, and a subsequent strategy to attack it.
Now the blog is called Program to Trade because "sit and hold" investing is dying and high frequency trading is becoming a reality for anyone who wants consistent profit. I will discuss varioius brokerage tools, as well as some computer programming tools. Namely I will be using Python 3.1 to create my programs. This is a free programming language that can be downloaded at Python 3.1.
If you are new to computer programming, then don't be worried! I will be reviewing all of the basics, so that you can begin to create your own code! It is a great skill to learn and maybe it will even make you some money.
I am currently in the process of setting up a website, titled, programtotrade.com. However, I figured where else to start than from the king of web development, Google. I will keep you updated to the status of the webpage's development.
You can reach me by email at programtotrade@gmail.com
This is going to be a collaborative space to discuss profitable trading strategies. We will discuss a wide range of products, with a large emphasis on hedging strategies and advanced option strategies. I will try to post a relevant post per day describing the current state of the market, and a subsequent strategy to attack it.
Now the blog is called Program to Trade because "sit and hold" investing is dying and high frequency trading is becoming a reality for anyone who wants consistent profit. I will discuss varioius brokerage tools, as well as some computer programming tools. Namely I will be using Python 3.1 to create my programs. This is a free programming language that can be downloaded at Python 3.1.
If you are new to computer programming, then don't be worried! I will be reviewing all of the basics, so that you can begin to create your own code! It is a great skill to learn and maybe it will even make you some money.
I am currently in the process of setting up a website, titled, programtotrade.com. However, I figured where else to start than from the king of web development, Google. I will keep you updated to the status of the webpage's development.
You can reach me by email at programtotrade@gmail.com
Subscribe to:
Posts (Atom)