We have modified our pairs trading recommendation system significantly. Here is what you can expect in future:
- Now expect holding period to be about 15 on average and 25 at maximum. In last few days, many recommendations were sent with unacceptable max holding periods, we have rectified that.
- Do not expect new pairs recommendations everyday. About 1 new recommendation in every 2 trading days can be expected.
The Techapaisa Team
Note: This article is only for premium users of pairs trading recommendations of techpaisa.com.
We have gone for a complete overhaul of pairs trading system as we were not satisfied with the results. Please exit the following open positions as soon as possible:
- DLF-IBREALEST (22 Oct 2014)
- DLF-ASIANPAINT (21 Oct 2014)
- UNITECH-IBREALEST (20 Oct 2014)
- DLF-HDIL (20 Oct 2014)
- MOTHERSUMI-EICHERMOT (09 Oct 2014)
- MOTHERSUMI-EICHERMOT (09 Oct 2014)
- ADANIPORTS-BHARATFORG (09 Oct 2014)
- NIFTY-AUROPHARMA (09 Oct 2014)
- JPPOWER-NTPC (09 Oct 2014)
- GLENMARK-AUROPHARMA (08 Oct 2014)
- GMRINFRA-BHARATFORG (07 Oct 2014)
- GMRINFRA-SIEMENS (07 Oct 2014)
- BAJAJ-AUTO-EICHERMOT (19 Sep 2014)
- APOLLOTYRE-EICHERMOT (19 Sep 2014)
- SIEMENS-BHARATFORG (19 Oct 2014)
- TATAMOTORS-MRF (16 Sep 2014)
- NIFTY-MARUTI (05 Sep 2014)
- LT-BHARATFORG (01 Sep 2014)
We will exit above recommendations at today’s close prices.
Q: What is pairs trading?
Ans: Pairs trading is a market-neutral strategy where one stock is bought and another is sold simultaneously. Read more here.
Techpaisa has developed a proprietary pairs trading platform where you can test pairs for feasibility for pairs trading free of cost. Check out the platform.
Q: What are pairs trading recommendations?
Ans: Techpaisa provide pairs trading recommendations to its premium users. You can have a look at all old recommendations here.
To understand pairs trading recommendations, please check our tutorial.
Q: How to become a techpaisa’s premium user and get pairs trading recommendations?
Ans: You can get a free trial for 1 week by registering here. After 1 week, service is paid.
Q: Do you send pairs trading recommendations by SMS?
Ans: Right now, pairs trading recommendations are sent over email only and not by SMS. Emails are sent to your registered email-id between 3:00PM and 3:25 PM on every trading day. Note that there might not be a recommendation on a trading day if our trading system does not find any trading opportunity.
Q: How to keep track of live divergence?
Ans: Read our tutorial here.
Q: How much quantity/lots to trade?
Ans: To find the number of future lots to trade for a given pair, you need to login on techpaisa.com and visit that particular pairs page. You will find the required information on the pairs page itself.
For example, for pair Sunpharma-Lupin, on this page, it is recommended that For every 3 futures lot of LUPIN, trade 2 futures lot of SUNPHARMA.. That is, if recommendation is Long Sunpharma and Short Lupin, you should buy 2 future lots of Sunpharma and sell 3 future lots of Lupin. If you have spare margin and want to put more money in this trade then you can buy 4 future lots of Sunpharma and sell 6 future lots of Lupin.
Note that on the recommendations page here, quantities are chosen such that total investment in one trade is Rs 2 Lacs. While actually doing trades, you will be trading in future lots and you have to trade such that ratio of quantity remains as stated here.
Q: When trading in futures, future of which expiry date should we trade?
Ans: Consider two points:
- Liquidity should be reasonable, i.e., volume traded in that futures should be large enough and bid-ask spread should not be big.
- We mention a maximum holding period in pairs trading recommendation. Decide expiry date based on this number. However, a trade would be closed before the maximum trading days prescribed if target or stop loss divergence is reached.
Remember you would need to roll out open positions to the next expiry if positions are open on an expiry day.
Q: Do you send an intimation to close the trade?
Ans: No. In the recommendation itself, we state the exit condition. A position can be exited under 3 conditions
- When target divergence is reached or
- When stop loss divergence is reached or
- When maximum number of trading days to hold the position have passed.
You have to keep track of live divergence yourself.
Q: How to learn pairs trading?
Ans: Get free trail of techpaisa’s premium service here. Then as you receive live recommendations, do paper trades i.e., don’t place traded with actual money but note them as if you would have done while actually trade. Then follow the trade everyday till it closes.
Q: What are least-risk recommendations?
Ans: Recommendations mentioned as LR (here) are least-risk recommendations where probability of loss is least. If you want to trade selective recommendations, then just trade LR recommendations. Note that it doesn’t mean that other recommendations are risky, we want to provide recommendations for users with lesser margin money to trade who can not trade all recommendations.
Q: Can I trade pairs trading recommendations using stock options?
Ans: Usually, we suggest trading in futures. But you can also trade in options if following is true:
- As most of the stock options traded on NSE are not that liquid, you must make sure that you are buying or selling an option only if it is liquid.
- If you want to trade options, then we suggest trading options with delta 1 i.e. in the money options as they behave like futures as long as delta is one.
- Trade in options only if you know the theory otherwise just trade in futures.
If you have any other query, feel free to mail us at firstname.lastname@example.org
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Techpaisa sends exclusive pairs trading recommendations to its premium users. If you want to become premium user, register on techpaisa.com and send an email to email@example.com
We will go over a recommendation by using one example. We sent a recommendation on 19th Feb 2013 of buying NMDC and selling HINDALCO.
Here is the recommendation:
Sell NMDC - Buy HINDALCO
Entry Threshold: 1.5
Target Divergence: 0
Stop Loss Divergence: -2.5
Current Divergence is: -1.45785
NMDC is trading at 137.25.
HINDALCO is trading at 98.85.
Whenever you receive a recommendation, visit the pair page on techpaisa.com. For example, in this case, visit NMDC-HINDALCO page.
How to calculate divergence
When doing pairs trading, you should understand what divergence is. (Read our earlier tutorial on pairs trading.) Simply put, divergence is a function of stock prices of constituent stocks in pair. In the above case, divergence is calculated using the folloing formula:
[hindalco_price - (0.8 * nmdc_price) - mean_error]/standard_error
Mean error and standard error are available on pair page.
Here is an explanation of terms:
- Time frame is 3 months which means divergence is tracked over a period of 3 months.
- Entry threshold 1.5 means that take positions when divergence is close to 1.5 (or -1.5) and current divergence specifies the exact divergence at which recommendation was given.
- Target divergence is 0 and stop loss divergence is -2.5.
- For this trade, it doesn’t make sense to recommend target prices and stop loss prices as we are dealing with a function of two prices. We suggest that on the pairs page, you follow real time divergence regularly and when the real time divergence hits target divergence or stop loss divergence (stated above for this pair), exit positions.
Other things to keep in mind:
- Take positions around the above prices. When you will do trades, you will be trading in future contracts of above stocks/indices, so the prices you get will be different from above because future contracts trade at certain premium/discount.
- Hold positions for a maximum of 40 trading days (in this example). This is calculated using half life of pair. Again, since you will be trading future contracts which have an expiry date, so when entering the trade, make sure expiry day is beyond the expected duration of trade which we have stated here.
- Maximum number of trading days is specified in each recommendations.
Hope this article clears some doubts about the terms used in recommendations. If there is any doubt, feel free to mail us at firstname.lastname@example.org
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