GGSAE
Registered: Nov 2003
Posts: 711 |
08-31-08 09:14 PM
Quote from yobo:
Just a follow up to my previous post. Current pair ratio of cf/pot is .877, the mean is .74. and two standard deviations away from the mean is .85.
Also, as you noted, the correlation of the two has been trending down and the mean ratio has been trending up.
Applying linear regression the predicted pair ratio is .822 using the last 30 days of trading.
Interesting enough, the predicted value is 1 standard deviation back towards the mean indicating a mean reversion.
I'll make this point again, but everything is dependent upon the timing of your trade and the time frame of your trade. The window of opportunity to lock in profits could easily pass you by with this one as the longer term trend is clearly favoring cf long and pot short.
But one has to remember that pair trading by definition means taking profits quickly and when you have them.
I use a number of probability sets for helping me generate signals (a couple different standard deviations are in there) and one thing you need to consider is that they're constantly changing. This is why I prefer a discretionary system over purely mechanical because even when the same conditions generating a buy/sell are triggered at different times, the probability sets are not quite the same (even though the numbers are) and you have to adjust for that....just something to consider, don't fight a big move just because some indicator is a screaming buy.
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