How to select the two legs of a pair trading?

Discussion in 'Strategy Development' started by domodo, Jun 7, 2006.

  1. domodo


    Hi,all,I'm a new guy on trading,expecially on pair trading,these days I'm considering how to select two legs on commodity futures intramarket pair trading.

    for example,there are 7 months contracts on CBOT soybean,if I wanna trade pair intramarket,how to select two months among these seven months and calculate the spread ?

    Is there any way to select the two legs of pair trading automatically by a software ?

  2. domodo


    no one is interested in this topic?
  3. Soybean Spreads? If you're bullish, you should tend to buy the "old crop" Summer months and short-sell the "new crop" Fall and Winter months. Vice versa if you're bearish. You can trade them on a one-to-one contract basis.
  4. Yes absolutly...I am reading this thread and trying to learn. This style of trading is the most rewarding in yield considering the drawdown.

    Michael B.

  5. domodo


    In your case,the tradable contracts of soybean are 7,8,9,11 contracts,for example,if the spread is regarded as bullish,from your suggestion,which month should I buy,7?and which month should I short,11?

    Could I draw a conclusion that,when the direction if the market is defined,all the months would be divided into two parts: old part and new part,and the most liquid month of the parts would be selected to buy/short ? how if the numbers of the parts are odd?

    Does a quantitative or mechanical rule to select legs of spread/pair trading ?

  6. rosy


    you could start by finding the seasonality of each contract. then create a correlation matrix and find high degree pairs. with those pairs find the extremes. if there is demand I could create a report and distribute it for a fee.
  7. domodo


    Trading by seasonality,maybe only several opportunities in a year,and it seems that it couldn't be done automatically....

    But still thanks for your tips.