Manually - always. For the following reasons: Pairs signals have to be filtered. Is the divergence statistical or have the fundamentals changed the relationship between the two stocks? Can the short stock be borrowed? As far as liquidity take/make - 90% make(BATS) If liquidity is low I will either use BYX who rebate takers, SMART Route it or pay up to get in the trade. Paying up for the take is a lot cheaper than seeing the stock run away from you. It pays not to be stubborn in this game.
For those of you interested in Pairtradefinder. The newest version (3) was released today and has added co-integration. This should produce better results vs the prior version which was based on correlation.
Yes. According to PTF, cointegration doubles the average profit per pair trade. I have started backtesting with the new version and I do see that many of my best actual pairs trades have higher cointegration value vs my losing pairs. This is just a quick reaction and I have more analysis to do. Here is what PTF says about cointegration and mean reversion (and there is lots about it if you google it): "Co-integration(CI) is similar to correlation(CR) in that it measures a relationship between 2 stocks, or etf's, options, futures, currencies. Why CI is better the CR is because CI measures the tendency for a pair to revert back to it's mean, where CR only measures the similarity in a relationship between the 2 instruments. To use a simple analogy to illustrate this point, consider this; A man and a women are walking down the road together, this is correlation, however the women stops to look in a shop window and the man keeps walking, then the women runs to catch up to the man, co-integration measures would recognize this relationship has a tendency to return to the mean(average), whereas in this case correlation would have broke down because the women stopped."
You will have to buy the upgrade, must have gotten an email. I am rerunning my pairs. I used to manually sort through ratio charts to pick "heartbeat" patterns. Using high cointegration does that for you it seems. i am happy with what i see. I still think this is 'a' tool. you still have to do your research, watch and search for news and make a judgement on short term movement.
Does anyone know how PTF calculates cointegration? Is it accurate? I've compared a few of my pairs against the figures at catalystcorner.com and the cointegration numbers can be very different. A high cointegration in PTF shows up as low in catalystcorner and vice versa.
No idea, although you would think it will depend on time period you are looking at. And who says catalyst corner got it right. Still need to see the chart and understand the relationship. Backtesting does show it gets better with high co-integration. don't know if same magnitude with increasing correlation pairs...maybe i will run a comparison..profitability at 80, 90 and 99 % correlation and cointegration..
Cointegration cannot usefully be reduced to a single number. The PTF promos said it would be "dumbed down" but oversimplifying runs the risk of misleading.
I think I found my dream pairs trading program. If only it was commercially available: http://www.youtube.com/watch?v=SSkaGf1Lr-U&NR=1