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