Equity pairs trading ratios

Discussion in 'Trading' started by FastandFurious, Sep 4, 2009.

  1. 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
  2. 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.
  3. i thought equating the notional values should be enough?
  4. Not at all. The recs I gave will help you greatly.