@UberMachine , I have already explained these points in my earlier posts, maybe you can once read this thread from the begining. That is one reason why I want to keep this thread simple and clean so that people new to Pair trading find information and understand the basics strategy and not get overwhelmed with complex concepts which are not required for day trading the pairs. Once they are familiar with the basics they can then explore other complex concepts and methods to automate it.
Just to briefly answer your queries:
How to select pairs?
>> Select pairs which has co-integration significance value less than 0.05, lower the value better.
What is the look back window?
>> In the script I have shared I have used 200 days for co-integration & 20 days for zScore calculations. These values are fine for day trading.
How to set entry and exit prices?
>> I have suggested the 1st 30 min candle break out strategy to trade the pairs, if one can understand the core idea of pair trading they can come up with their own strategy.
What and threshold to use?
>> Usually a zScore value more than +/- 2 SD is good to initiate the trades. However this is more applicable for position trading as one need enough buffer, for day trading even a lower threshold should be fine.
How to backtest this strategy?
>> One can use zScore values in association with the stock closing prices for backtesting. However for day trading I do not see much benefit of doing this as one can easily perform direct walk-forward testing for few days to understand the characteristics of the pair. One can just select few good co-integrating pairs and trade on it till the co-integration falls apart.
But If one wants to position trade it they can use reinforcement machine learning models or deep learning models to identify pairs which show similar characteristics, but these are complex methods and I dont recommend it to beginners. In trading its always better to keep it as simple as possible, more complexities does not mean more profits.
Also as we discussed earlier, lets keep the automation/coding and tool specific discussion in a separate thread.
Just to briefly answer your queries:
How to select pairs?
>> Select pairs which has co-integration significance value less than 0.05, lower the value better.
What is the look back window?
>> In the script I have shared I have used 200 days for co-integration & 20 days for zScore calculations. These values are fine for day trading.
How to set entry and exit prices?
>> I have suggested the 1st 30 min candle break out strategy to trade the pairs, if one can understand the core idea of pair trading they can come up with their own strategy.
What and threshold to use?
>> Usually a zScore value more than +/- 2 SD is good to initiate the trades. However this is more applicable for position trading as one need enough buffer, for day trading even a lower threshold should be fine.
How to backtest this strategy?
>> One can use zScore values in association with the stock closing prices for backtesting. However for day trading I do not see much benefit of doing this as one can easily perform direct walk-forward testing for few days to understand the characteristics of the pair. One can just select few good co-integrating pairs and trade on it till the co-integration falls apart.
But If one wants to position trade it they can use reinforcement machine learning models or deep learning models to identify pairs which show similar characteristics, but these are complex methods and I dont recommend it to beginners. In trading its always better to keep it as simple as possible, more complexities does not mean more profits.
Also as we discussed earlier, lets keep the automation/coding and tool specific discussion in a separate thread.
