Pair trading. How to close orders with maximum profit? - page 8
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are not correlated but cointegrated. Correlation can be high, but there will be no spread return to zero. Cointegration is essentially the scientific formalization of this return and of spread trading in general. But you can do it without science. Just flat trading on the spread)) Spread stationarity is a dream. Either it is temporary, or the deviations from zero are so small that they do not cover the costs. Therefore, periodic stationarity, or flat areas on the spread in simple terms, is sufficient.
There are no cointegrated instruments in forex - don't fool the guy with all these nuances
Well, I kind of wrote that it's a scientific ideal abstraction that doesn't exist. But you don't need it in its entirety either - temporary flotsam on the spread is enough. Correlation has nothing to do with it at all.
We build a spread (a new symbol) and study how flat it is and under what conditions (filters) it is flat. And we trade like a flat on any other instrument.)
well, I kind of wrote that this is a scientific ideal abstraction that doesn't exist. But it doesn't need it in full either - temporary flotsam on the spread is enough. Correlation has nothing to do with it at all.
We build a spread (a new symbol) and study how flat it is and under what conditions (filters) it is flat. And we trade like a flat on any other instrument.)
Do you know how to spot a flat area in advance?
on some instruments, yes)
Well, spit it out!
what do you want me to tell you? :)
Pair trading and the spread in particular still boils down to this))
Last question - if you know how to detect flat in advance, why do you need pair trading at all?
because it is a new instrument which could potentially be very flat. This applies to commodities and stocks mostly.
P.S. I can tell you in advance when the fx is flat, for example. Overnight)) It's just that you still need to know how to trade a flat.
When you overlay one chart on top of another, the distance between the charts is the spread
If the instruments are correlated, then after the divergence they should converge again - the spread decreases to 0.
With the spread - the divergence of pairs is clear, but now another question: how do we know that the spread (divergence) has reached its maximum value, or at least close to it?
And another question: is it possible to trade the spread without considering its value, i.e. to trade on both increasing spread and decreasing one, if there is no answer to the first question?