1 Using Correlated Stocks as a Leading Indicator: An Applied Pair Trading Strategy Don Bright & Darren Clifford

2 What is a correlated stock? Statistical vs. intuitive  Some stocks show correlation just because they are both related to the market, not to each other: Spurious correlation.  Want stocks that have an intuitive reason to be correlated.  Same sector  Similar business models  Work with each other in different processes.

3 Leaders and Followers Know your stocks:  Which stock is generally the leader in the sector?  Which stock trades more volume?  Any news events to cause leadership for that day?

4 Quantitative Analysis Filling in of the opening gap Average daily ranges Historical spread movements Opening only order candidates

5 Pair Charting 65 Day to 10,000 day historical pair charts. Spread range and volume charts. Basic technical indicators.

6 Automated Programs Charting your profits and losses Gap indications Automated enveloping program Opening only strategy Pair tracking software Pair charting software Automated pair layering execution system.

7 The Setup Movement in the lead stock is generally followed by a movement in the secondary stock. Wait for movement in the lead stock and confirmation of continue in move and then trade the secondary stock.  Lead stock rises $0.2 and still shows signs of buyers: buy the secondary stock.

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9 The Exit Reversal in lead stock. Movement of the secondary to catch up to the lead stock.  From here, with no sign of more buyers, direction is random. PRICE ACTION OF LEAD STOCK DEFINES ENTRY AND EXIT.

10 Extra’s Movements off the opens Pair off instead of capitulating on the trade.  Benefits of shorting first.  Benefits of buying first. Compounding probabilities Thanks for listening in to the Pairs Trading portion of our discussion. Don and Darren

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