when doing a pairs trade, how do you look at the charts and what you trade? For example, the price difference between XOM-CVX is minimal 69.18(XOM)-68.96(CVX) would you trade it 1:1, meaning buy and sell 100 shares each? However, for other pairs such as MRK-PFE, the price difference is almost double 30.70(MRK)-16.93(PFE) would you trade it 1:2, meaning to equate the notional value, for every 100 shares of MRK you buy, you sell 200 shares. And on the chart, you would display "MRK-2*PFE" Any help is appreciated
It's not as simple as you are assuming. Suggest learning about hedge ratios and co-integration a bit. I recommend picking up Chan's quantitative trading book for a nice layman's description and practical examples that can be replicated.