1
Has Bank Nifty vs Nifty Peaked?
2
AXISBANK vs ICICIBANK Pair Performance
3
INDUSINDBK vs YESBANK Pair Performance
4
HDFC vs HDFC Bank Pair Performance : Part 2
5
Capital Allocation for Pair Trades
6
How to Backtest Pair Trades in PairTradePro.com
7
What is Pairs Trading?
8
Launching PairTradePro.com Today

Has Bank Nifty vs Nifty Peaked?

In the last 6 months, right from Feb 2016 both Bank Nifty and Nifty have been on a continuous bull run. Bank Nifty has moved from 14000 to 20000 levels and Nifty have moved from 7000 to 9000 levels. In this bull run, Bank Nifty has significantly outperformed Nifty. During Feb 2016, Bank Nifty to Nifty ratio was close to 2.0 and now it is currently trading close to 2.30 levels. So the ratio has moved up by 15%, which means Bank Nifty has out performed Nifty by 15%. The main reason for this is the outperformance of banks and financials that constitute the Bank Nifty. On the other hand Pharma and IT, the major components of Nifty have underperformed significantly.

Below is the ratio chart of Bank Nifty to Nifty. From the chart you can see that on 26 Jan 2015 the ratio hit its lifetime high of 2.31 and then on it started correcting and reached 2.13 on 25 Feb 2015. This is about 9% correction. That is Bank Nifty got corrected 9% than Nifty on relative basis. Similarly, On Nov 2015, it crossed 2.2 and corrected till Feb, 2016 and reached 1.94 levels. This shows that whenever the ratio crosses 2.20 level there is a significant resistance. Resistance either leads to correction or stagnation.

banknifty_nifty_sep2016

Bank Nifty vs Nifty – Ratio Chart (Till Sep 2016)

As said earlier, post the bull run in last 6 months, Bank Nifty to Nifty ratio has moved from 1.94 in Feb 2016 to 2.29 level currently, which is closer to its previous lifetime high. The above chart shows how strong the bull run has been.

Added to this, the SD has also crossed 2.5 SD in the last few days.

bn-nifty

Considering all these factors, it looks like Bank Nifty is set for an underperformance against Nifty from here on.

AXISBANK vs ICICIBANK Pair Performance

Period: 2010 to 2015
LookBack: 100
Entry SD: 2
Exit SD: 1
Last Update: 04 Nov 2015

See the performance of AXISBANK vs ICICIBANK pair performance from 2010 to 2015. In this Part 2 report, we cover the performance of the pair on Lookback: 100 Days with different Entry/Exit parameters. You can access the Part 1 report here.

Note: All results are calculated for an investment amount equal to 1 Lot in F&O ~ 3 Lakh.

Profit-Loss Table – 2010 to 2015

The below table shows the Profit-Loss per Year and Total Profit-Loss, Winning Rate, Average Profit-Loss per Trade, Average Holding Period per Trade and more specifics.

axisbank_icicibank_performance_21_nov15

Cumulative Profit-Loss Equity Curve – 2010 to 2015

The below chart shows the Cumulative sum of Profit-Loss per Trade over the period with the same Investment Amount.

axisbank_icicibank_cumulativepl_21_nov15

Holding Period Per Trade – 2010 to 2015

The below chart shows the Holding Days per Trade over the backtest period. The right axis indicates the No.of days and the bottom axis indicates the date starting from 2010.

axisbank_icicibank_avgdays_21_nov15

Profit-Loss % Chart Tradewise – 2010 to 2015

The below chart shows the Profit % per Trade over the backtest period. The left axis indicates the date period and the bottom axis indicates the percentage return.

axisbank_icicibank_profitchart_21_nov15

Profit-Loss Table – 2010 to 2015

The below table shows the Profit-Loss per Year and Total Profit-Loss, Winning Rate, Average Profit-Loss per Trade, Average Holding Period per Trade and more specifics.

axisbank_icicibank_performance_2515_nov15

Cumulative Profit-Loss Equity Curve – 2010 to 2015

The below chart shows the Cumulative sum of Profit-Loss per Trade over the period with the same Investment Amount.

axisbank_icicibank_cumulativepl_2515_nov15

Holding Period Per Trade – 2010 to 2015

The below chart shows the Holding Days per Trade over the backtest period. The right axis indicates the No.of days and the bottom axis indicates the date starting from 2010.

axisbank_icicibank_avgdays_2515_nov15

Profit-Loss % Chart Tradewise – 2010 to 2015

The below chart shows the Profit % per Trade over the backtest period. The left axis indicates the date period and the bottom axis indicates the percentage return.

axisbank_icicibank_profitchart_2515_nov15

Profit-Loss Table – 2010 to 2015

The below table shows the Profit-Loss per Year and Total Profit-Loss, Winning Rate, Average Profit-Loss per Trade, Average Holding Period per Trade and more specifics.

axisbank_icicibank_performance_32_nov15

Cumulative Profit-Loss Equity Curve – 2010 to 2015

The below chart shows the Cumulative sum of Profit-Loss per Trade over the period with the same Investment Amount.

axisbank_icicibank_cumulativepl_32_nov15

Holding Period Per Trade – 2010 to 2015

The below chart shows the Holding Days per Trade over the backtest period. The right axis indicates the No.of days and the bottom axis indicates the date starting from 2010.

axisbank_icicibank_avgdays_32_nov15

Profit-Loss % Chart Tradewise – 2010 to 2015

The below chart shows the Profit % per Trade over the backtest period. The left axis indicates the date period and the bottom axis indicates the percentage return.

axisbank_icicibank_profitchart_32_nov15

INDUSINDBK vs YESBANK Pair Performance

Period: 2010 to 2015
LookBack: 100
Entry SD: 2
Exit SD: 1
Last Update: 04 Nov 2015

See the performance of INDUSINDBK vs YESBANK pair performance from 2010 to 2015. In this Part 2 report, we cover the performance of the pair on Lookback: 100 Days with different Entry/Exit parameters. You can access the Part 1 report here.

Note: All results are calculated for an investment amount equal to 1 Lot in F&O ~ 3 Lakh.

Profit-Loss Table – 2010 to 2015

The below table shows the Profit-Loss per Year and Total Profit-Loss, Winning Rate, Average Profit-Loss per Trade, Average Holding Period per Trade and more specifics.

indusindbk_yesbank_performance_21_nov15

Cumulative Profit-Loss Equity Curve – 2010 to 2015

The below chart shows the Cumulative sum of Profit-Loss per Trade over the period with the same Investment Amount.

indusindbk_yesbank_cumulativepl_21_nov15

Holding Period Per Trade – 2010 to 2015

The below chart shows the Holding Days per Trade over the backtest period. The right axis indicates the No.of days and the bottom axis indicates the date starting from 2010.

indusindbk_yesbank_avgdays_21_nov15

Profit-Loss % Chart Tradewise – 2010 to 2015

The below chart shows the Profit % per Trade over the backtest period. The left axis indicates the date period and the bottom axis indicates the percentage return.

indusindbk_yesbank_profitchart_21_nov15

Profit-Loss Table – 2010 to 2015

The below table shows the Profit-Loss per Year and Total Profit-Loss, Winning Rate, Average Profit-Loss per Trade, Average Holding Period per Trade and more specifics.

indusindbk_yesbank_performance_2515_nov15

Cumulative Profit-Loss Equity Curve – 2010 to 2015

The below chart shows the Cumulative sum of Profit-Loss per Trade over the period with the same Investment Amount.

indusindbk_yesbank_cumulativepl_2515_nov15

Holding Period Per Trade – 2010 to 2015

The below chart shows the Holding Days per Trade over the backtest period. The right axis indicates the No.of days and the bottom axis indicates the date starting from 2010.

indusindbk_yesbank_avgdays_2515_nov15

Profit-Loss % Chart Tradewise – 2010 to 2015

The below chart shows the Profit % per Trade over the backtest period. The left axis indicates the date period and the bottom axis indicates the percentage return.

indusindbk_yesbank_profitchart_2515_nov15

Profit-Loss Table – 2010 to 2015

The below table shows the Profit-Loss per Year and Total Profit-Loss, Winning Rate, Average Profit-Loss per Trade, Average Holding Period per Trade and more specifics.

indusindbk_yesbank_performance_32_nov15

Cumulative Profit-Loss Equity Curve – 2010 to 2015

The below chart shows the Cumulative sum of Profit-Loss per Trade over the period with the same Investment Amount.

indusindbk_yesbank_cumulativepl_32_nov15

Holding Period Per Trade – 2010 to 2015

The below chart shows the Holding Days per Trade over the backtest period. The right axis indicates the No.of days and the bottom axis indicates the date starting from 2010.

indusindbk_yesbank_avgdays_32_nov15

Profit-Loss % Chart Tradewise – 2010 to 2015

The below chart shows the Profit % per Trade over the backtest period. The left axis indicates the date period and the bottom axis indicates the percentage return.

indusindbk_yesbank_profitchart_32_nov15

HDFC vs HDFC Bank Pair Performance : Part 2

Period: 2010 to 2015
LookBack: 100
Entry SD: 2
Exit SD: 1
Last Update: 25th August 2015

See the performance of HDFC vs HDFC BANK pair performance from 2010 to 2015. In this Part 2 report, we cover the performance of the pair on Lookback: 100 Days with different Entry/Exit parameters. You can access the Part 1 report here.

Note: All results are calculated for an investment amount equal to 1 Lot in F&O ~ 3 Lakh.

Profit Loss Table – 2010 to 2015

The below table shows the Profit-Loss per Year and Total Profit-Loss, Winning Rate, Average Profit-Loss per Trade, Average Holding Period per Trade and more specifics.

hdfc-hdfcbank-100-2-1-n

Here, this pair has made a Total profit of  ₹3.14 Lakh with a 93% Winning Rate.

Cumulative Profit-Loss Equity Curve – 2010 to 2015

The below chart shows the Cumulative sum of Profit-Loss per Trade over the period with the same Investment Amount.

hdfc-hdfcbank-100-2-1-n-eq

Holding Period Per Trade – 2010 to 2015

The below chart shows the Holding Days per Trade over the backtest period. The right axis indicates the No.of days and the bottom axis indicates the date starting from 2010.

hdfc-hdfcbank-100-2-1-n-td

Example content 2
Example content 3

Capital Allocation for Pair Trades

Money management in pair trading revolves around 3 important aspects:

  1. Diversification
  2. Purchasing Power
  3. Leverage

1. Diversification:

A wise pair trader would never place all his eggs in one basket. Diversification is the key to profitable pair trading over the long run.

Things to consider for proper diversification:

  1. Don’t have too few open pair trade positions.
  2. Don’t risk too much capital on “ONE” single pair.
  3. Don’t allocate too much capital on pair trades with “same” stocks. (e.g. Axis vs ICICI, Axis vs HDFC, Nifty vs Axis)
  4. Don’t select most pairs from one specific sector.

Percentage (%) of Capital:

Rule of thumb: Never allocate more than 10% of your capital in any one pair or a stock.

For illustration purpose let us consider a portfolio of 10 pairs, with 10% allocated to each pair, and half the open pairs contain the same stock such as ICICI vs AXIS, ICICI vs HDFC, ICICI vs KOTAK, etc., so basically HALF the portfolio is being driven by the movement of ONE specific stock i.e. ICICI. A competent pair trader will never allocate funds in such a way.

A sound portfolio manager would restrict the capital allocated to a pair or a single stock, such as ICICI in the above illustration. While trading multiple pairs with same stock the allocation should be carefully calculated.

Sector Balance:

A wise trader will give attention to sector balance in a portfolio at any given time. Building a pair portfolio of only pharma stocks or bank stocks may be considered too aggressive and risky. A single news item with significant impact on the sector will severely impact the portfolio. Proper diversification spread across many sectors will restrict the overall volatility.

2. Buying Power or Purchasing Power:

Pairs trading requires a fair amount of buying strength, or purchasing power, as it involves diversification with many pairs. Before taking a trade, the buying power should be checked to take advantage of opportunities. For instance, if the plan is to enter a trade at 2.5 SD and then further average (layer) by taking another trade at 3.5 SD, sufficient buying power is essential for execution. If there isn’t enough buying power the trader may lose the opportunity to add a new layer and thereby lower the average cost. So what it means is the trader will not be able to improve his performance post the initial entry point. Proper money management is extremely important to implement a multiple-entry-level strategy.

Buying power is not just for existing trades. You can open new positions only if you allocate the right amount of capital in each pair. Going aggressive in a particular pair by allocating too much capital would result in losing other profitable opportunities.

3. Leverage Ratio:

The amount of leverage varies from broker to broker. Leverage can turn both advantageous or disadvantageous. A successful pair trader will not use disproportionate amounts of leverage and be exposed to unwarranted risk. For e.g., let’s say a trader is using an enormous amount of leverage, 50 to 1. That means for every 1 lakh cash in the account, he trades 50 lakh worth of stock. That scenario can be highly profitable generating a 50x return, but the reverse of this can be a disaster. So it’s always wise to maintain leverage ratio at an optimum level.

As a rule of thumb, unless trained, a pair trader should not go beyond a leverage factor of 10 to 1 to their cash balance.

How to Backtest Pair Trades in PairTradePro.com

Step 1: Select the 2 stocks that you are going to backtest. For this tutorial e.g. I am selecting AXISBANK and HDFCBANK.

bt1

Step 2: Select the date period for backtesting. Select the From Date and To Date. For this e.g. I am selecting from 01-Feb-2005 to 24-Aug-2015

Step 3: Give your backtest parameters or leave default as below.

bt2

Step 3: Press the View result button to get backtest results. You will get the full list of trade results. The trade results table provide these details: Trade Date Period, Profit/Loss for 10000 Invested, Profit/Loss %, and Trade Duration.

Loss trades are highlighted in Red as shown above.

bt3

For this e.g. I will explain the last trade. The last pair trade between AXISBANK vs HDFCBANK, was during 27-07-2015 to 03-08-2015. The trade made a profit of 349.55 for ₹ 10000 invested on each side. To put it simpler the profit is expressed in percentage. Here it is 1.75%. The duration of the trade was 6 days.

Thought: Just think how much profit you would have made had you traded 1 lot each in F&O.  You would have made well above ₹11000 in 6 days. Isn’t that good?

Step 4: Summary of results are displayed at bottom. You can see the following details: Total Profit, Max Profit, Average Profit per Trade, and Average Duration of Trade.

bt4

 

What is Pairs Trading?

Pairs trading is a market-neutral strategy in its most simple form. The market neutral strategy is built using two securities, consisting of a long trade in one security and a short trade in other. Equities are the most preferred asset class for pair trading.

In pairs trading, traders select two correlated or comparable equities and initiate a trade on those two stocks based on their relative performance in short to medium term. Traders calculate the mean ratio of the selected two stocks, and based on that buy the underpriced stock, and sell the overpriced one. The basic idea behind the trade is, over a longer time frame the ratio between two stocks fluctuates less than stocks themselves. So when the price ratio of a particular pair deviates significantly from the calculated mean, there is an opportunity to cash in profits as the ratio will move towards the mean ratio and close down the gap.

Pair-trading based on price-ratio deviation is the most commonly used strategy. Some traders prefer to place pair trades simply based on the price gap between two securities, anticipating the gap will revert back to the mean. The residual method is a less used strategy as it involves complex calculations.

Launching PairTradePro.com Today

Hi! This is my first post.

Today I am launching the newly developed pair trading website. For the past few years I have been regularly using pair trading for my own personal trading and I found it very simple to understand and execute. Though there are few softwares available for pair trading I have not found a reliable free tool made for Indian stock market. This pair trading script was initially developed for my personal use, but recently I felt that it is something that every trader must have. I have done a basic stable version to start with. Soon I will bring in more features to this web application. That’s it. Hope you find this site useful.

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