Using Correlated
Stocks as a Leading
Indicator: An Applied
Pair Trading Strategy
Don Bright & Darren Clifford
www.stocktrading.com
www.pairtrader.com
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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.
2
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?
3
Quantitative Analysis

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Filling in of the opening gap
Average daily ranges
Historical spread movements
Opening only order candidates
4
Pair Charting



65 Day to 10,000 day historical
pair charts.
Spread range and volume charts.
Basic technical indicators.
5
Automated Programs

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
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Charting your profits and losses
Gap indications
Automated enveloping program
Opening only strategy
Pair tracking software
Pair charting software
Automated pair layering execution
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system.
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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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.
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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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