Basic question about pairs trading : How do I anticipate or avoid spread moving to new level?

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Basic question about pairs trading : How do I anticipate or avoid spread moving to new level?

posted Jun 3, 2017

Hi,

I am new to pairs trading. I'm an old options floor trader trying to teach myself something new. Recently
started pairs trading with highly correlated/co-integrated futures pairs like silver/gold.
Problem is....I do well for several days, but then one product (usually silver), will make a huge move and gold
will never catch up....establishing a new level to trade the spread. Any trades made during the move at 2-3 standard
deviations around mean will be losers.

Is there any way to anticipate or avoid these times?

thank you

2 responses

Its complicated but I can think of structural breaks or change point analysis on the spread.

Thanks Pravin. ,
Yes , it appears complicated. Is the Gregory–Hansen cointegration test the way to go here? Is running the test something
I could do in real time?

thanks, mitch

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.