Over the next few weeks I'll be rolling out some ideas and tools for pair trading. Rather than reinvent the wheel I'll rely on what I believe are some of the most robust and effective pair trading metrics available to the average retail trader and they all reside at Market Rewind.
The actual Rewind matrix is a fee based product, but incredibly modest in price. Jeff's major focus is the ETF universe, but the pairs tester and optimizer can handle stocks as well and in the spirit of my 3 finger lead systems, I'll show in subsequent posts how using select high beta components of various ETFs in conjunction with the underlying ETF as a pairs trade can produce rather stunning results.
For today's example, I just ran a comparison of DBA against NEM. Now I could have used GLD as the gold proxy, but frankly, as I've mentioned before, some financial products just don't track that well technically and from that perspective NEM is much superior to GLD (just my experience).
The Rewind Pairs Analysis tab has a number of great features that let you get a good sense about a trade's potential in a very short time.
First of all, you've got real-time pricing, so hypothetically you could update the file every 60 minutes (or sooner) to catch any changes in the operative signals, which are clearly defined as Long, Short or Out.
Once the pair is set up and date downloaded (instantaneous) a simple tap of the Optimize button will calculate the rolling z-score, beta and hypothetical P&L. Depending on where you decide to execute the trades (at the band crossover, at the cross back at the zero line) you incur more or less risk exposure and more or less net return.
The matrix tab lets you test a variety of combinations at once while the Rewind page itself allows the creation and application of multiple scanning filters to limit the pair parameters.
Jeff's got a number of videos that explain the Rewind processes . . all provide an excellent guide into what this Mother Lode of a program can deliver. Updates and refinements are on-going and the program promises to be valuable component of my trading, so check it out.