Cointegration Pairs Strategy (Python)

This strategy trades two assets that share a long-term cointegration relationship. By calculating the residual between the first asset and a beta-adjusted second asset, it looks for deviations that historically revert back to equilibrium. A long position buys the first asset and sells the second when the residual z-score drops below -EntryThreshold. A short position sells the first and buys the second when the z-score rises above the threshold. Positions are closed once the spread normalizes toward zero. Cointegration pairs trading suits statistical arbitrageurs comfortable managing two instruments simultaneously. The built-in stop-loss protects against extreme moves if the relationship temporarily breaks down.

• Entry Criteria:

• Long: Residual Z-Score < -EntryThreshold

• Short: Residual Z-Score > EntryThreshold []Long/Short: Both sides. []Exit Criteria:

• Long: Exit when |Z-Score| < 0.5

• Short: Exit when |Z-Score| < 0.5 []Stops: Yes, percentage stop-loss. []Default Values:

• Period = 20

• EntryThreshold = 2.0m

• Beta = 1.0m

• StopLossPercent = 2.0m

• CandleType = TimeSpan.FromMinutes(5) [*]Filters:

• Category: Arbitrage

• Direction: Both

• Indicators: Cointegration

• Stops: Yes

• Complexity: Intermediate

• Timeframe: Intraday

• Seasonality: No

• Neural networks: No

• Divergence: Yes

• Risk Level: Medium