same time frame 1b 2b which one shows reversion which one is a spread which one is outright which one is easier to trade ?
same time frame 1c 2c which one shows reversion which one is a spread which one is outright which one is easier to trade ?
my guess is that 90 % of the people dont know which is which even if they trade spreads because this is the new age of spreads! teh computers are so fast you cannot tell much of a difference and the mean reversion jumps between the 2 at odd times and this is a very very well known and often quoted spread
I wouldn't use looks. Human vision is incredible at finding patterns that aren't there. That's why technical analysis is tea leaf reading. I would run the augmented dicky fuller test on each series looking to disprove the null - a unit root. Supposing I could disprove it at a sufficient p-level (0.10 is probably fine for trading) I'd look further into it. With the ADF test in place I at least know I have something to work with. Of course the series could lose it's cointegration for a number of factors and monitoring that is a critical component in managing a spread. Then I'd probably do something simple like testing bollinger bands. A dead simple strategy for a cointegrated series. There are more complicated methods but a backtest with BBs would at least give me another data point. A strongly mean reverting series won't suddenly break because "the new age of computers is so fast". I'm talking about a spread you hold for several months. You won't find these in efficient markets which are markets you shouldn't be playing in anyway (looking at you MES/ES/NQ/YM). Divergences in strongly correlated series imply an inefficiency. If you let the math tell you where to go you'll be fine most of the time. Kelly criterion will save you from ruin if you apply it properly given your confidence intervals.
Combine Mean and Trend I think is key.... I have an over all direction to trade with 42lwma current theory, so only trade with, then a range based around 18lwma which adapts as uses High and Low averages + a market %. More rubber band theory buy low range, sell high range, with over all trend improves odds massively and if overall is flat then that creates erratic market don't bother trading.
The trick is to switch to trading mean reversion when the markets are choppy and to switch to breakouts when markets are trending I have a great system that does this, i call it the Holy Grail
Appreciate the lengthy post but why not take a guess at which one is which on the charts? Everyone who knows anythng about pairs n ratios knows all about the math and the how and the why and absolutely anyone who knows anything about arbitrage which is just spread trading understands that yes indeed the computers and hft have wreaked havoc to a solid strategy for retail traders at home. I am not sure if this is ELITE INVESTING or ELITE TRADING because what you are describing is elite investing holding for months on end instead weekly or daiy swing trading. you can run all those tests all you want and in application within few sexonds of your math calculating how many times the mean has been crossed which is all a reverson test boil down to typically it can all chagne in an instant and when you need to exit and or reverse you pay double the fees double the slippage. the entire reason auto spreaders exist is due to the fact that speed is everythign in order to get your price as you compete with every other outfit doing and trying to exploit mean reversion on different time frames and levels. I am pretty sure i proved my point that when you look at a spread chart vs an outright most of the time you would have a lot of trouble figuring out which one is which and that is why instead of actually taking the time to guess you just went on a long tangent instead of taking the chance at being wrong. it is ok to make a guesss at which chart 1 or 2 is the spread and which one is the ourtfigtht and absolutely you can eyeball charts and "SEE REVERSION" you do not need to run mathematically tests to clearly see reversion but the math ad there are way more ways to skin a cat than what you mentioned of course and im sure you know that because even google knows that about spreads. the bottom line is that all of it has risk and the one that is better is the one you trade better if a trader or invest in better if an investor. THis also brings up an interesting point how in a virtual almost annonymous blog site no one want to take a shot at guessing which chart is which because they are afraid of being wrong even though its just a free website. this goes to show just how scared of beign wrong most people are and no one reading this is SO BUSY they cant take a guess at 1 of these pairs of charts in order to maybe learn something.
Stock Pairs have gotten to be next to impossible to day trade. Hell, I don’t even like futures intra market pairs (same instrument different month).
Dude, look at CL or ES on a Daily with RSI. If you’re fading overbought/oversold (selling on overbought, buying on oversold) you’re getting smoked. Been that way for years now.