Thursday, October 08, 2009

Qs Pair Basket - Part 3

Continuing my Qs pair basket study, I've shown 4 Qs pairs from the Qs matrix related to the materials/metals. The optimized lookback (N) periods vary from 4 -8 days and the resultant trades number 6-19. Perhaps surprisingly, there's not a direct correlation between the value of the (N) and the number of trades. The variation in differential beta between the pairs may account for this disparity and, as mentioned in several previous posts, paying attention to these beta values is an essential component of managing risk on these trades.
My argument in developing the Qs pair basket is that by maintaining a number of correlated pairs focused on the Qs when the trigger signals align, the probability of successful trades increases correspondingly.
The other pair metric that requires confirmation is the alignment of the P&L equity curve relative to the R2 slope, and in the 4 charts posted here we have a close correlation. It's important to also track the execution dates of the trades to see if the trade is open or closed as that will determine precisely where the equity curve slope is riding relative to the optimized R2 line.

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