Pair Trading based on BNF/NF Ratio:
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- A pairs trade or pair trading is a market neutral trading strategy enabling people to profit from virtually any market conditions: uptrend, downtrend,
or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy.
- Cointegration factor:0.14, Correlation factor:0.88 for BNF/NF Pair for last 1 backtested data.Both Factors will change on Daily Bais.
- The correlations between financial quantities are notoriously unstable. Nevertheless, correlations are regularly used in almost all multivariate
financial problems. An alternative statistical measure to correlation is cointegration.
- This is probably a more robust measure of linkage between two financial quantities, but as yet there is little derivative theory based on this concept.
- Two stocks may be perfectly correlated over short timescales, yet diverge in the long run, with one growing and the other decaying.
- Conversely, two stocks may follow each other, never being more than a certain distance apart, but with any correlation, positive negative or varying.
If we are delta hedging, then short timescale correlation matters.
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- Pair Trading Signals generated on backtested Data. Pair Trading Signals generated based on Pair Ratio breaching 2 Standard Deviation
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Note- In this Example only single pair trade is demonstrated which BNF and NF pair
100's of pairs can be created/tested based on correlation and co-integration factors after scanning 100+ scripts on daily basis and pushing alerts during
business hours for execution.Module is in WIP.
Ref link- Visit zerodha.com/varsity/chapter/pair-trading-basics/
Pair Trading Signals generated based on Pair Ratio breaching below 1.5 and above 1.5 Z-Score Value-