Can You Pair Trade Using VWAP?

[Glueman 10]

Hi

I read quite a bit on another board about intra-day pair trading using VWAP. One needs to plot VWAP and MPD bands (max deviation) and the high level concept is to SHORT a stock at Upper MPD and LONG a stock at lower MPB (with correct Position Sizing).

 

In theory, this approach should create a market neutral strategy so market direction is eliminated.

 

I was wondering if anyone can add any 'meat to the bones'?

 

Thanks

GM

[SangreDeToro 10]

price is mean reverting generally - when its not mean reverting it is creating a new mean.

 

ie. knowing when the shift is occuring is pretty important so you aren't waiting for ever for a reversion to occur...

[BlowFish 10]

You might enjoy the trading with market statistics threads. Whilst they don't deal with pairs specifically they give a fairly comprehensive coverage of VWAPs and standard deviations of it.

[Trader333 10]

This was a strategy of Grey1 who has posted on here previously. One of the key elements is that it should only be used on trading days that are not trending and the way in which Grey1 suggested this be done is to see if the Dow opened at less than 50 points from the previous close. If so then the vwap pair trades were an option.

 

 

Paul

[brownsfan019 17]

This was a strategy of Grey1 who has posted on here previously. One of the key elements is that it should only be used on trading days that are not trending and the way in which Grey1 suggested this be done is to see if the Dow opened at less than 50 points from the previous close. If so then the vwap pair trades were an option.

Paul

 

That's an interesting, simple way to gauge a trending day or not. Has there been any statistical study done to confirm this?

[Trader333 10]

That's an interesting, simple way to gauge a trending day or not. Has there been any statistical study done to confirm this?

 

I don't know but the strategy worked well.

 

 

Paul

[brownsfan019 17]

I don't know but the strategy worked well.

 

 

Paul

 

Worked - as in past tense? Or 'still working' as in present tense?

[Charlton 10]

This was a strategy of Grey1 who has posted on here previously. One of the key elements is that it should only be used on trading days that are not trending and the way in which Grey1 suggested this be done is to see if the Dow opened at less than 50 points from the previous close. If so then the vwap pair trades were an option.

 

 

Paul

Paul

 

I assume that this is on the basis that if the Dow opened at less than +/- 50 points of the previous close, there is no strong conviction to either continue in the direction it was going on the previous day or to reverse direction.

 

If there is no strong conviction either way then the assumption would be that we have a consolidation day and therefore pair trading would be a viable option. The basic concept then being to trade with reversion to mean vwap.

 

If on the other hand the day exhibits trending characteristics then a directional trade that enters near vwap and exits at the MPD bands would be in order, but based on stocks chosen as exhibiting the appropriate strength or weakness with respect to the market according to the market direction being taken.

 

Charlton

[Trader333 10]

Worked - as in past tense? Or 'still working' as in present tense?

 

This strategy was used around 2004 by Grey1, myself and a few others. Since then I have moved away from trading US stocks so I am unable to say whether it still works today but there is no reason that it shouldn't do in my view.

 

 

 

Paul

[Trader333 10]

Paul

 

I assume that this is on the basis that if the Dow opened at less than +/- 50 points of the previous close, there is no strong conviction to either continue in the direction it was going on the previous day or to reverse direction.

 

If there is no strong conviction either way then the assumption would be that we have a consolidation day and therefore pair trading would be a viable option. The basic concept then being to trade with reversion to mean vwap.

 

Charlton,

 

Basically "yes" to the above part of your post.

 

If on the other hand the day exhibits trending characteristics then a directional trade that enters near vwap and exits at the MPD bands would be in order, but based on stocks chosen as exhibiting the appropriate strength or weakness with respect to the market according to the market direction being taken.

 

This is not how we traded it at the time and as an example, if the Dow was bullish then we would take a trade when price touched the lower MPD to go Long and exit at vwap or better.

 

 

Paul