Build & analyse Pair strategies across any 2 scrips with correlation & trade ratios & see the trading bands along with buy/sell/exit signals
How is Pairs to be used ?
- the corrleation is the standard statistical measured used on the 2 prices, in simple terms it is how close the 2 stock prices go hand-in-hand , the higher the correlation, the better the pair funda would apply
- as for +-% levels , it is a simple ratio of the 2 prices & a Bollinger band on this ratio.
( with 2 Std deviations & 20 periods avgs)
- so when the ratio touches the bottom band line, it is likely to bounce back in due course back inside the region & is a buy signal for that pair, likewise if it goes above the upper band, it is a Sell signal
- The spread value at the bottom is the INR value of (buy 1 lot of scrip1 * rate1 * Tradelots_Ratio) – (sell 1 lot of scrip2 * rate2)
- the % level is essentially how close to the band the price ratio is trading at. the lower it is the closer it is to the band & hence chance of a pair signal being triggered ...
- NOTE : a -ve level% implies it is breaking out of the band strongly, so advisable to wait till the dust settles & the ratio starts flattening out from there)
- Also one thing we've observed.. the pair is best taken--> not necessarily when it cuts the upper/lower band .. but rather , when the trend of the ratio line seems to be flattening or reversing from its previous rise/fall trend