Value

So didn't post this, but my pairs trade was crippled when Citi didn't pass their stress test.

this got me to thinking about the roll value plays in this. I have always seen trading as simply a numbers game, and have started realising that there are two teirs of trading

technical, where you use historical algorithms to try and find high probability situations where trades will be profitable

and fundamental, where you inherently look at the risk of the portfolio, and use the valuation of various securities to off set risk.

problem with this is that I am a FX guy at heart, which means technical is my game...buttttt what if I was to give a country value?

I have started throwing ideas around on how to value a country so you can buy the higher value, sell short a delta neutral version of the lower value, and profit.

this has lead me into my economics book.

1.  Interest rates.  Although this is a good indicator of what is strong or not, hard to choose the timeframe I wish to trade.  Should I use only post auction 10y bonds? etc.

2.  Real GDP m/m.  Harder and involves some calculations but more plausible.


now is there a way to create a sort of index of fundamental values for an economy so I could just grade these countries m/m and test whether or not the higher valuation is correlated to the movement of the FX rate?

Today Close

Started the day +0.92%, closed the day +1.842%

interesting is looking at the excel placed linear trendline, looks like it has done some sort of mean reversion:

Anyone have any idea how I can get the trendline to also post a trendline at 1 standard deviation?

Updates

Spread dipped a little bit, but looking to recover.  Added a linear line to try and show mean some sort of mean reversion.

Updates in life:

Dad came home from the hospital Monday, so things are improving.  Updated resume, so lets see if  I can find an internship or something like that.

March 1st update...1.66% in 8 days...

Very interesting...dealing with the long term data I find I made some mistakes possibly, this way I am doing two trades, and actually calculating the PnL...very interesting...

Quant ideas

Ok so this is going to be a rant about something I tried to figure out when I ran a 1 year (May 16 2011 - present) data chart (same as other one posted) for the same stocks.

Realised that it was quite a volatile strategy, so got me into thinking about how to use a mean reversion strategy for this (I think it's called mean reversion?)

So here is what I did:

• Took Stock Prices and imput them to excel (using yahoo finance historical eod data)
• Took the higher priced stock and set base number of shares to 1000.
• calculated how many shares that same dollar amount would be equivellent in the other stock
•  Added both day 1 capital to eachother
• took day 2-day1 as the return on the day
• Calculated the ROR per day
• Calculated STDEV of the ROR
• also calculated -STDEV, 2STDEV,-2STDEV
•  Charted everything

 So what I think I have is the change in the value of the portfolio from day to day.

What I see now is this:

 Notice how there is a giant move on here?

Am wondering now how to profit from this large (possible 3STDEV move)?

Considering this:

• When ROR Breaks 2STDEV:
• Sell portfolio
• When ROR breaks -2STDEV:
• Buy Portfolio

Looking for someone to advise on this.  Please Comment or Find me on Linkedin.

Lost a little today

So decided to just post visual chart instead of actual numbers to keep it easier to follow (plus allows me to play around in excel a little more)...

Top is the dollar amount invested in each stock starting on the 1st day, and the gains/losses from each (in dollars).
Bottom is the spread between the two stocks (in dollars).

As of closing friday..L/S is profitable!

Closing prices today:
BAC: $7.88   $32 071.60 short $284.90
C: $32.35 $32 350.00 $-10
Profit: $274.90

original $ in trade: $64 716.50
profit: 0.425%

notes:
was interesting seeing a reversal and seeing how the short moved enough not just to offset loss on higher priced C, but also to move the pair trade into profitablilty.

Also just completely random but having 284.90 loss on BAC Thursday, and then same amount profit on Friday.