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My first triplet
Peter Poon
posted

I would like to share my first triplet. Following the previous post on grid search for cointegrated baskets, I search across thousands of stocks and ETF for cointegrated combinations, and here is one of them that I think make sens. The combination is 'NASDAQ:AXAS', 'NYSE:MTOR', 'NYSE:NOV'. They make sense because AXAS is a petroleum company and MTOR is an auto part company and NOV is an oil drilling equipment company. They are quite related in terms of their business. Return over the past 7 years are high, although the volatility is a little large.

The tricky part of mean-reversion strategy is I don't know how to effectively stop loss. The basic principle of mean reversion is the more price falls the more you buy, but when it keeps falling you loose a lot. I tried to put a stop loss on this strategy but never got good results. Please comment and critique. Thanks.

1 response
Leo Vaghi

Stop loss works well for momentum strategies, but not at all for mean reversion strategies. One possibility that is suggested in the literature is to stop the trade after a given amount of time has elapsed. I did not (yet) try it, but at least sounds more reasonable than a stop on price...

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