Jisek Pair Trading

We have received a lot of queries about pair trading. A section of the market still thinks about pair trading as a novel way to make money. For us pair trading is about identifying a trend, a relative trend between two assets over a certain holding period.

This relative trend can be used for pairs or for creating a portfolio of winning stocks. This is why we use relative pair strategies to select stocks for our model portfolios. A few other reasons why we use relative pair performance to filter out stocks. First, even pair performance is connected in time. A winning stock can underperform a losing stock, the moment you stretch time (change holding period). Second, conventional pair trading (or statistical arbitrage) is thought to be better in the highly correlated pairs. It is assumed that tighter the pair correlation, better the inter pair hedge and better the risk situation. In our time fractals paper we explained how even high correlated pairs can generate a large performance divergence and more than a risk free rate of interest.

However trading tight correlated pairs is very poor way to do pair trading. Because a better pair selection can tremendously improve the risk-return equation. What’s a good pair selection? Jiseki helps us identify a top potential outperformer and top potential underperformer in a large group of 1000 stocks. For example here we have illustrated the best portfolio long component vs. the best short portfolio component. The most unlikely of pairs, a pharmaceutical company clubbed with a metals major is not your conventional pair, but what is non conventional might have a better risk-return. The pair was negatively correlated and delivered 52% in 54 days. The latest ALPHA carries the portfolio update.

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Our Jiseki Time cycles are seasonal patterns of strength or weakness in assets. They are derived from percentile rankings from 1 to 100. The higher the percentile more the chance for an asset to weaken and worst the ranking, better the chance for the respective asset to outperform. 100 is top relative performance and 1 is worst performance. The idea is that performance is cyclical. A top performer will underperform in future and vice versa. A top relative performer is also the worst value pick and the top relative underperformer is the best value pick. Jiseki is another name for Performance cycles, time triads and time fractals. The signals are illustrated as a running portfolio and as Jiseki Indices. These signals can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades.

Jiseki Interpretation. Signals are interpreted as crossovers between various Jiseki Cycles. All three Jiseki cycles (Jiseki 1,2 and 3) depict different time frames. Example: An asset is ranked above 80 percentile and all the three Jiseki cycles are pointing lower, this suggests a running SHORT SIGNAL. Our Jiseki Indices use different kind of exits based on price and Jiseki Cycles. We have color coded the (Jiseki 1>Jiseki 2) SHORT zones with brown sandy (burlywood) and grey (Jiseki 1>Jiseki2) for LONG SIGNALS.

Domnita Pascut is the founding member of Orpheus Capitals.  Her interest in charts and market patterns was an extension of her keen understanding of social mood and sentiment. How charts could say so much intrigued her. She worked on market patterns, economic research, cyclicality and economic history. It was her liking for history which helped her see the cyclical natures of markets and patterns. Domnita gives more weightage to conventional technical analysis, channels, trendlines, market patterns and Fibonacci. She combines all this with basic Elliott structures, performance cycles and high low close bars.


One Response to “Jisek Pair Trading”

  1. Shaun says:

    Hi, please let me know what you think of this Pair Trading strategy where you trade based on when one stock may outperform another on a certain day. There is a really cool Excel tool to support automating the analysis behind this new day trading or pair trading strategy -

    http://www.youtube.com/watch?v=r-8QNBxiGyo

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