Tuesday, October 27, 2009

Pairs Basket Weaving

Sorry to display this spreadsheet in such small format but this seemed like the best way to show the correlation between the trade trigger dates generated by the z-score band reversals.
Double-click to zoom up and you'll see the trade dates for each of the seven FXY pairs.
Obviously, the UUP is the real chatterbox here, although we can easily adjust (reduce) the trade frequency by ratcheting up on the width of the Z-score band.
The whole argument behind using a basket of ETF/stock pairs to trade a single ETF (in this case FXY), is that the more high correlation pairs fire a confirming signal, the lower the risk of a losing trade. There's been some confusion in recent emails between the terms "correlation" and "convergent". These are 2 different concepts. ETFs/stocks can be convergence or divergent . . they typically can move together or move contrary to one another. . these are directional vectors. Correlation is a measure of how closely the ETFs/stocks move in relationship to one another . . this is a scalar.
We've clearly got some strong trade confirmation signals here and tomorrow I'll line up the PDQ signals with the FXY price chart.

4 comments:

me said...

Beautiful !

Mr Sweden

jgpietsch said...

Very very interesting...

TradingToWinMeansFollowTheRules said...

This is interesting for sure but I was hoping you could summarise the calculation process for the table? There are so many posts on this and i don't know whether its possible to give a high level summary on the approach/methodology

Thanks

bzbtrader said...

Trading to win......
There are so mnay posts because the purpose of the posts is to chronicle my exploration of ways to trade pairs that are not typical and to provide my readers some background on what I'm doing..namely using the momentum of a pairs basket to trade a single focus ETF or stock. There are a number of canned pair trading solutions available if that's the route you want to follow. I have expended 380 hours of my time over the past 9 weeks (I keep track) developing the dashboard methodology and various PDQ baskets as well as preparing these posts. The PDQ Dasboard is now approaching Stage 1 completion and I'll endeavor in a future post to summarize the approach although I keep hammering away on it almost daily.