Pairs Trading Strategy

by QuantShare, 4909 days ago		Share \|

A pair strategy consists of taking one long position in a stock or security against a short position in another stock or security. The goal of such as strategy is to make profits on diverging performance and at the same time reducing risk and exposure to the global market because the strategy is equally invested in long and short positions.

The current trading strategy contains a money management script that allows you to easily backtest pair trades.
The pairs trading strategy is as follow: Buy one stock and sell the other if the spread is 2 standard deviations above or below the spread mean over a specific period (This period can be specified). Sell the pair positions if the spread is inside one standard deviation of the mean. The spread is calculated by dividing the first pair stock by the second pair stock. The lookback period used to calculate the spread mean and the spread standard deviation is the same.

There are two input fields in this strategy. The first one allows you to enter the pairs you want to backtest. Example: A|AA,GOOG|MSFT. The format is: Pair1,Pair2 and each pair's security must be separated by "|".
The second input field let you define the lookback period that is used by the money management pairs trading to calculate the mean and the standard deviation of the pair spread.

The trading system allows you to simulate or backtest several pairs. In the system's number of positions you can define the number of pairs to allow at the same time. A value of two means that only one pair can be traded during the same period.

You can also create an optimizer where each optimization creates a pairs trading strategy for a specific pair of stocks.
To do this, click on "Optimize" under the "Pairs" input field and enter several pairs separated by a semicolon. Example: AA|AACC;A|AA.

Click on "Save Money Management Inputs" then click on "Optimize" at the top of the backtester form to start the optimization process.