This is one way of doing it that's for sure BUT why is historical correlation so important.? Well one would argue that the past repeats itself correct ? BUT The more important question to my mind would be WHY is now different? Once you have the answer to this you now have the golden goose. ARB the emotion - that's where the money is.
neveragain, ive done tests on eft's, indices etc... found high winning rate, however lower profit per trade, but I guess you could you use size and scale down as you suggest as tail risk in those spreads are almost non-existant. I think correlation is a good & simple tool to see how well two shares have moved in unison historically, but like many suggest a high correlation doesn't equal a good pair to trade, like you say yobo there is a difference between correlation and reversion to the mean probability, i have a few pairs that have above 85% correlation, however I wouldn't trade them as there 2 stocks in different industries. Also all statistical tests are done looking back, we have to trade the hard right edge of our charts and look into the future, looking at historical data is a good tool amongst other tools, however relying on it soley is like driving around with a 10yr old street map, things are still the same, however there are subtle differences. There has too be a bit of common sense in pair trading, for example you may run tests over a pair for eg C/FNM and find highly predictive divergence/convergence oscillations, however you would be gambling to trade this pair going forward. Ive got no financials on my radar at the moment as I think the risk of an outlier event is elevated in that sector. Corporate scandals, concentrated business risk, lawsuits, currency movements, mergers, aquisitions, changes to dividend policy, capital raising, spinoffs, among many other things can affect stock prices going forward that no amount of backtesting will predict. I think pair trading is a balance of science, art & application.
These guys offer it. They also have some automation programs if you want to black box some of your strategies. http://www.pairtrader.com/index.php Statistical data on a few thousand pairs.
Closed another trade today for a profit: Sold GENZ @ 78.05 Covered BAX @ 68.28 Opened new trade today: Long LOW @ 25.65 Short HD @ 29.15 Open trades: 12 Wins: 9 Losses: 0
Found a interesting newspaper article from 1894, the governors from the NYSE were trying to stop arbitrage trading between NYSE, Philadelphia & Boston stock exchanges. http://query.nytimes.com/mem/archiv...6173EEF33A25756C2A9629C94659ED7CF&oref=slogin
I am starting to trade pairs once again and was looking for some guidance. I want to trade pairs that can possibly be day traded but may last for a few days at most. I am not overly technical stats guy but am looking for names that act similar. The names I am playing right now are somewhat obvious hd/low aapl/rimm but I am also doing a pot/x and slb/cvx. I am hoping to find a few more ideas like the second 2 which are similar but not what most guys on the street are also doing. If anyone has any ideas I would welcome the advice...thanks
went and logged on and the site was loaded with spyware and who knows what else....thanks but no thanks
haha..i just tried it and it worked fine so for the fun of it i went to google and did a search for it(like i think you did) and your right it sends you to this wacked out spyware website....weird...if you type in market-topology.com in your address bar it will not do whatever google is doing and it will be the real site...