forex pair trading cointegration

and short its competitor as a hedge, in pairs trading the aim is to select a stock that is going to outperform its peers. Therefore that will be our criteria for 2007. If the price enters a tail in any direction, a trade is triggered in anticipation that it will soon return into the bells belly. This allows to hedge the first asset by a reverse position in the second asset, and this way derive profit from mean reversion of their price difference: where y1 and y2 are the prices of the two assets and the multiplication factors h1 and h2 their. What is the difference between correlation and cointegration? Such a model predicts the current price yt from the previous price yt-1 plus some function f of a limited number of previous prices plus some noise term : The time distance between the prices yt is the time frame of the model; the number. It just must drift less as in a random walk.

Heres the script of a simple mean reversion system: function run vars Price series(price vars Filtered series(HighPass(Price,30 vars Signal series(FisherN(Filtered,500 var Threshold.0; if(Hurst(Price,500).5) / do we have mean reversion? They definitely do seem to move together. In case someone wants to experiment with the code snippets posted here, Ive added them to the 2015 scripts repository. Alas like many of my so-called brilliant flashes of insight, a little googling revealed that not only had others come up with it decades earlier, but their techniques were more elegant and robust than my first stab. The P L curves are all from EUR/USD, an asset good for demonstrations since it seems to contain a little bit of every possible inefficiency). LOW ) and Home Depot hD ) might be highly correlated.

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