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Hi All!
Does this video relate to the spread trading method described in this thread?
Because I can't figure out what is the basic idea behind spread trading?
Something about the links to the video not working, direct links below:
https://www.youtube.com/watch?v=AhPjvEHxpL8
https://www.youtube.com/watch?v=D7wX6pvI2Ew
https://www.youtube.com/watch?v=SgMmETMGDEg
>
The basic idea is this (very simplified):
The market is said to seek equilibrium. And if the prices of two or more cointegrated, related instruments have diverged greatly in different directions, then, because of the desire for equilibrium - the market tends to bring the prices back - to "zero" point.
This is what spread trading is based on, i.e. "arbitrage" pairing, triple arbitrage and so on.....
That is, at the point of maximum divergence - we buy those instruments, - whose lines are below the average lilac line and sell those simultaneously, whose line is above the average lilac line. Expecting that instrument prices will move towards each other
To give you an example, a visual real triple entry/exit on the divergence and convergence:
Here is an example of a spread chart with entry points and directions.
Do I understand this strategy correctly?
Yes, - perhaps you can work as you wrote. And, more expedient would be to build a channel, - the boundaries of which (upper and lower) will be set parallel to your muving - at a given optimal distance and work on the rebound in from the boundaries of the channel (see the bottom indicator of the spread line) :
The soybean spread ZMZ0-ZLZ0 -
leonid553, thanks for the explanations. Really interesting strategy if we take into account that a spread chart built on very correlated instruments cannot have a prolonged trend, then trading inside the channel is very promising.
I would like to warn those who build spreads on correlated stocks (Google, etc.), do not trade the spread on these stocks before the quarterly report of any of the stocks, as with the release of the quarterly report on the stock, there may be a decent gap and you do not know whether it will be in your direction.
Funny article about paired trading. I understood 10 per cent :(
http://www.russian-trader.ru/forum/viewtopic.php?t=8393