Question on pair trading. - page 3
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You do not understand the meaning of the word 'stationarity'. I have nothing to add. The word says it all, it has the answer to your question.
Stationarity has nothing to do with the question raised by the writer.
You do not understand the meaning of the word 'stationarity'. I have nothing to add. The word says it all, it has the answer to your question.
stationarity has nothing to do with the question raised by the topiker.
Most immediate.
Explain and justify mathematically what is the advantage of a EURUSD buy entry and GBPUSD sell entry over a single EURGBP crossover entry
the mathematical explanation is called "cointegration". Proven 30 years ago and used for 30 years.
Most immediate.
Explain and justify mathematically what is the advantage of a paired buy EURUSD and sell GBPUSD entry over a single EURGBP crossover entry
the mathematical explanation is called "cointegration". Proven 30 years ago and used for 30 years.
There is no advantage. This is just another nonsense.
The cross is not cointegrated and any linear combination of two currency pairs in a portfolio is not cointegrated.
So what does cointegration have to do with it? It has nothing to do with it.
You have nothing to add, because stationarity in no way contributes to the correct entry point in pair trading, it only ensures that the spread will return to zero sooner or later,
I certainly assumed in my question that the lots are calculated correctly.
Well, then it would essentially be a cross. The difference can only become apparent with a very large price change when the A/B chart becomes different from the A-B chart.
It is just that not everyone needs this "correctness" (i.e. balanced risk on both legs). For some, it is more important that the resulting spread chart hangs in a horizontal channel (looks stationary)
If you enter BYE-SELL positions at a deviation of 2 ско, there is about a 5% chance of even more deviation. There is a 95% chance of going back to 0, where there will be an exit. Since it is a deviation, there will be a profit.
Also nonsense - pairs are not stationary. This probability calculation for non-stationary pairs is incorrect. And it makes no difference if two pairs and a cross are traded
I ask you, dear specialists and fans of the paired trading, to explain and ground mathematically what is the advantage of EURUSD buy entry and GBPUSD sell entry in comparison with single entry for EURGBP cross. And is there any advantage at all? I personally have my doubts about this question. If there is no advantage, then using currency pairs that have one currency in common (in the above example is USD) does not make sense in pair trading?
If you buy 1 lot of EURUSD and sell 1 lot of GBPUSD, the equity movement will be identical to the EURGBP movement. This is clear to everyone. But there are two points here:
1. the volatility is higher, so if the combined spread of two majors is the same or almost the same as that of their cross, it is better to trade with majors in terms of saving on the spread.
2) By changing the lot size of the majors, you can change the final equity behaviour, and it will not look as much like their cross movement. This is not an advantage in itself, but an additional possibility.
If you buy 1 lot of EURGBP and sell 1 lot of GBPUSD, the equity movement will be identical to the EURGBP movement. This is clear to everyone. But there are two points here:
1. the volatility is higher, so if the combined spread of the two majors is the same or almost the same as their cross, it is better to trade with the majors in terms of saving on the spread.
2) By changing the lot size of the majors, you can change the final equity behaviour, and it will not look as much like their cross movement. This is not an advantage in itself, but it is an option.