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 yobo   Registered: Jul 2007 Posts: 157 08-31-08 05:31 PM Interesting post about the correlation trend. And to further the discussion.... Quick question for anyone in the know... Excel has a forcast calculation based on linear regression. To use this function I believe one would use the current mean pair ratio as the value you want to base off of to predict a future value, and then plug in the range of the correlations and the range of the pair ratios to get a predictive value? Anyone else doing this or have experience with excel and statistics to confirm I am using the right data points and ranges etc. Thanks. Edit/Delete • Quote • Complain
 yobo   Registered: Jul 2007 Posts: 157 08-31-08 05:58 PM 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. Edit/Delete • Quote • Complain
 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. Edit/Delete • Quote • Complain
 TraderD72   Registered: Oct 2007 Posts: 131 08-31-08 10:33 PM Quote from yobo: But one has to remember that pair trading by definition means taking profits quickly and when you have them. I am wondering how this fits into an overall risk/reward profile? If you enter a trade when the pair is 2 stdev's away from the mean (for example) is your profit exit goal at 0 stdev's? 1 stdev? Now if the pair continues to diverge I understand you add layers (new trades) but without an ultimate hard stop loss point I am not sure where you could/would set your profit target. Edit/Delete • Quote • Complain
 Emilio_Lizardo   Registered: Jun 2006 Posts: 179 09-01-08 03:51 AM Quote from TraderD72: ... if the pair continues to diverge [from 2 stdev] I understand you add layers (new trades) If the pair gets much beyond 2 stdev, take your loss and get out. Edit/Delete • Quote • Complain
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