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