Pairs Trading

Pairs Trading Expert Advisor automates the execution and position management of a very popular speculative investment strategy used in Wall Street called pairs trading.

Pairs Trading Expert Advisor is a powerful tool that will do all the simultaneous calculations and position management for you, open the combined pair position when the entry level is breached, take your profit upon reversion or stop your losses should the pair’s long-term relationship brakes, letting you focus on your statistical-business analysis and thus maximize your profits.

Input parameters

Lets assume that we have identified a long-term relationship between Derwent London plc (DLN) and Great Portland Estates plc (GPOR) for the period between 2015/01/01 and 2015/06/30. Moreover lets assume that after applying an econometric research analysis we have found that the long-term relationship between Derwent and Great Portland is given by the following equation:

Derwent=-576.41+4.964*Great Portland+error

Given the above equation, the Pair’s Trading price is: Pair’s Spread = Derwent-(-576.41+4.964*Great Portland) = error (Screenshot1)

The error term is a stationary time series, meaning that it fluctuates around its long-term mean, and our actual profit generation component. For the abovementioned example and based on our sample observations the statistical characteristics of the error are the following (Screenshot2):

Mean: 0.189,Standard Deviation: 50.186, Skewness: 0.578, Kourtosis: 2.818

• Stocka: Is the symbol of the first pair component. In our example DLN for the Derwert London plc.
  
• Stockb: Is the symbol of the second pair component. In example GPOR for the Great Portland Estates plc.
  

Before typing any pair symbol please make sure that the corresponding investment instruments are added to the navigator window. To add an instrument you should right click on navigator window, go to Symbols, select the desired instrument and then click on the show button.

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