Registered: Mar 2010
03-14-13 01:06 AM
I think the guiding criterion is that the instruments must, first of all be uncorrelated. Then they must be liquid and have options. All those you can find with those features will be ok.
There is no point in using 2 "systematically" correlated (directly or inversely) instruments, as it only makes the folio management more cumbersome.
When I programmed the application I tried to make it completely "fool-proof", but it's better not too use it foolishly introducing correlated stuff :-)) : this way the cointegration features will limit their action to the "temporary" or random correlations which may and do take place.
The "systematic correlation" should not be introduced. In case use larger sizes on the chosen instruments. This because we want to distribute our investment on "essentially different" opportunities.
Avoid "bear" instruments because they tend to scalp much less (and often slide to 0). Avoid anything has seen "splits" in the past. (Avoid futures with excessive contango.) Avoid the wildest 3X (or limit their usage in particular extreme circumstances, where "amplification" of moves can be useful).
Always use options as explained on my site.