Pair Trading Lab Algorithms & Strategies - Revision history

Admin at 19:48, 26 November 2014

2014-11-26T19:48:37Z

Admin: /* Min Profit Potential */

2013-11-07T14:19:01Z

‎Min Profit Potential

Admin at 18:00, 11 May 2013

2013-05-11T18:00:40Z

Admin at 17:58, 11 May 2013

2013-05-11T17:58:17Z

Admin at 17:41, 11 May 2013

2013-05-11T17:41:03Z

Admin at 17:34, 11 May 2013

2013-05-11T17:34:29Z

Admin at 17:34, 11 May 2013

2013-05-11T17:34:13Z

Admin at 17:31, 11 May 2013

2013-05-11T17:31:06Z

Admin at 14:28, 11 May 2013

2013-05-11T14:28:25Z

Admin at 14:25, 11 May 2013

2013-05-11T14:25:03Z

@@ Line 2: / Line 2: @@
 == Pair Trading Model ==
 [[File:Ptl-portmanager-detail3.png|right]]
 Currently supported models are these:
-=== Ratio Model ===
+* Ratio Model
-This is on of the standard pair trading models described in literature. It is based in ratio of instrument prices, [http://en.wikipedia.org/wiki/Moving_average moving average] and [http://en.wikipedia.org/wiki/Standard_deviation standard deviation]. In other words, it is based on [http://en.wikipedia.org/wiki/Bollinger_Bands Bollinger Bands] indicator.
+* Residual Model
+* Kalman Model
-Model parameters:
-* entry threshold for Z-score, typical value range is <1.5, 2.5>, 2.0 is used most often
-* exit threshold for Z-score, typical value is <-0.5, 0.5>, 0 is used most often
-* max Z-score (optional, to filter out extremes, typical value is >4 if used)
-* moving average period (typical range <10, 100>), default = 15
-* moving average type (algorithm), default = exponential
-* standard deviation period (typical range <10, 100>), default = 15
-* entry mode (simple, uptick, downtick)
-−
-(todo: detailed description)
-−
-−
-=== Residual Model ===
-Residual mode is based on [http://en.wikipedia.org/wiki/Linear_regression linear regression]. Linear regression of both stocks is constructed in order to fit a linear relationship between both instruments and estimate its best parameters. Then, [http://en.wikipedia.org/wiki/Standard_deviation standard deviation] is applied on the regression residuum to estimate its statistical properties and calculate Z-score.
-−
-Model parameters:
-* entry threshold for Z-score, typical value range is <1.2, 2.5>, 1.5 is used most often
-* exit threshold for Z-score, typical value is <-0.5, 0.5>, 0 is used most often
-* max Z-score (optional, to filter out extremes, typical value is >4 if used)
-* linear regression period (floating window is used), typical range <15, 100>, default = 15
 == Trading Hours For Real-Time Trading ==
 [[File:Ptl-portmanager-detail1.png|right]]

@@ Line 105: / Line 105: @@
 The estimated profit potential is displayed in the PTL Trader in real-time, even if the rule is not enabled.
-Remark: The estimate can be negative for Residual Model. This is not a bug - it is correct. It may happen in some situations if the A coefficient is negative. For Ratio model, the estimate is always positive.
+Remark: In PTL Trader older than v1.0.4, the estimate might be sometimes indicated negative for the Residual Model. This is not a bug - it is correct. It may happen in some situations if the A coefficient is negative. Starting with PTL Trader v1.0.4, the estimate algorithm has been modified and it is not always defined for all Residual model setups (usually when prices converge together and the residual model has troubles to fit prices together). In this situation, the estimate is indicated as 0.0.
 '''All extra rules may be modified anytime in PTL Trader, also if there is a position opened.'''
 (todo: more info about the estimate algorithm)

@@ Line 1: / Line 1: @@
 Pair Trading Lab offers pair trading algorithms based on various mathematical models. In additional, extra trading rules are available on top of that. All these models are supported in both online backtester and PTL Trader. All extra rules are supported in PTL Trader, only some of them in the online backtester. The backtester will be updated later to support all of them too.
 == Pair Trading Model ==
 Currently supported models are these:
 === Ratio Model ===

@@ Line 1: / Line 1: @@
 Pair Trading Lab offers pair trading algorithms based on various mathematical models. In additional, extra trading rules are available on top of that. All these models are supported in both online backtester and PTL Trader. All extra rules are supported in PTL Trader, only some of them in the online backtester. The backtester will be updated later to support all of them too.
+== Pair Trading Model ==
-Mathematical models are these:
+Currently supported models are these:
-== Ratio Model ==
+=== Ratio Model ===
 This is on of the standard pair trading models described in literature. It is based in ratio of instrument prices, [http://en.wikipedia.org/wiki/Moving_average moving average] and [http://en.wikipedia.org/wiki/Standard_deviation standard deviation]. In other words, it is based on [http://en.wikipedia.org/wiki/Bollinger_Bands Bollinger Bands] indicator.
@@ Line 17: / Line 17: @@
-== Residual Model ==
+=== Residual Model ===
 Residual mode is based on [http://en.wikipedia.org/wiki/Linear_regression linear regression]. Linear regression of both stocks is constructed in order to fit a linear relationship between both instruments and estimate its best parameters. Then, [http://en.wikipedia.org/wiki/Standard_deviation standard deviation] is applied on the regression residuum to estimate its statistical properties and calculate Z-score.
@@ Line 28: / Line 28: @@
 (todo: detailed description)
 == Extra Rules ==
 [[File:Ptl-portmanager-detail2.png|right]]
@@ Line 86: / Line 106: @@
 Remark: The estimate can be negative for Residual Model. This is not a bug - it is correct. It may happen in some situations if the A coefficient is negative. For Ratio model, the estimate is always positive.
-(todo: more info about the estimate algorithm)
+'''All extra rules may be modified anytime in PTL Trader, also if there is a position opened.'''
-== Trading Hours ==
-[[File:Ptl-portmanager-detail1.png|right]]
-You can define trading hours for real-time trading. You can set:
-* time window for opening new positions (start and end hour/minute)
-* time window for closing existing positions (start and end hour/minute)
-Currently, only US stocks are supported so these times are meant in ''New York'' time zone, which is EST. In future versions you will be able to select another time zone, too.
-Default time windows are set from 9:45 AM to 3:55 PM EST, which is proper configuration for users who want to trade pairs through the whole trading day. If you want to trade only and the end of day, you can easily change this.
-== Instrument Margins ==
-You need to manually setup margins for all instruments you trade, because PTL Trader has no idea what are particular margin requirements.
-You specify different margin for each leg. Default setting is 50% (leverage 1:2), which is a correct setting for US stocks on Req-T Margin accounts. So '''as long you just trade stocks, you don't need to change anything.''' But if you trade ETFs, especially leveraged ones, you '''must find out current margin yourself''' and set it right! For instance, for some triple-leveraged ETF like FAS, FAZ the margin should be set to 90%.
-Remark for users having Cash Account (no margin): we don't recommend pair trading to you at all, upgrade your account to margin account first!
+(todo: more info about the estimate algorithm)
-−
-'''Remark #1: This is a critical setting for proper management. If you set this wrong, PTL Trader will open either too big or too small positions.'''
-−
-'''Remark #2: In general, pair trading strategies keep positions overnight. So if you are going to find out your margins, look at overnight ones (intraday margins are lower, but not relevant for this type of trading)'''

@@ Line 29: / Line 29: @@
 (todo: detailed description)
 == Extra Rules ==
 In addition to trading rules determined by mathematical models, some extra useful rules are also supported:
 === Max Days (Time Stop Loss) ===
@@ Line 87: / Line 88: @@
 (todo: more info about the estimate algorithm)
 == Trading Hours ==
 You can define trading hours for real-time trading. You can set:
 * time window for opening new positions (start and end hour/minute)

← Older revision		Revision as of 17:34, 11 May 2013
Line 99:		Line 99:

	'''Remark #1: This is a critical setting for proper management. If you set this wrong, PTL Trader will open either too big or too small positions.'''		'''Remark #1: This is a critical setting for proper management. If you set this wrong, PTL Trader will open either too big or too small positions.'''
		+
	'''Remark #2: In general, pair trading strategies keep positions overnight. So if you are going to find out your margins, look at overnight ones (intraday margins are lower, but not relevant for this type of trading)'''		'''Remark #2: In general, pair trading strategies keep positions overnight. So if you are going to find out your margins, look at overnight ones (intraday margins are lower, but not relevant for this type of trading)'''

← Older revision		Revision as of 17:34, 11 May 2013
Line 98:		Line 98:
	Remark for users having Cash Account (no margin): we don't recommend pair trading to you at all, upgrade your account to margin account first!		Remark for users having Cash Account (no margin): we don't recommend pair trading to you at all, upgrade your account to margin account first!

−	'''~~Important~~: This is a critical setting for proper management. If you set this wrong, PTL Trader will open either too big or too small positions.'''	+	'''Remark #1: This is a critical setting for proper management. If you set this wrong, PTL Trader will open either too big or too small positions.'''
		+	'''Remark #2: In general, pair trading strategies keep positions overnight. So if you are going to find out your margins, look at overnight ones (intraday margins are lower, but not relevant for this type of trading)'''

← Older revision		Revision as of 17:31, 11 May 2013
Line 86:		Line 86:

	(todo: more info about the estimate algorithm)		(todo: more info about the estimate algorithm)
		+	== Trading Hours ==
		+	You can define trading hours for real-time trading. You can set:
		+	* time window for opening new positions (start and end hour/minute)
		+	* time window for closing existing positions (start and end hour/minute)
		+	Currently, only US stocks are supported so these times are meant in ''New York'' time zone, which is EST. In future versions you will be able to select another time zone, too.
		+	Default time windows are set from 9:45 AM to 3:55 PM EST, which is proper configuration for users who want to trade pairs through the whole trading day. If you want to trade only and the end of day, you can easily change this.
		+	== Instrument Margins ==
		+	You need to manually setup margins for all instruments you trade, because PTL Trader has no idea what are particular margin requirements.
		+	You specify different margin for each leg. Default setting is 50% (leverage 1:2), which is a correct setting for US stocks on Req-T Margin accounts. So '''as long you just trade stocks, you don't need to change anything.''' But if you trade ETFs, especially leveraged ones, you '''must find out current margin yourself''' and set it right! For instance, for some triple-leveraged ETF like FAS, FAZ the margin should be set to 90%.
		+
		+	Remark for users having Cash Account (no margin): we don't recommend pair trading to you at all, upgrade your account to margin account first!
		+
		+	'''Important: This is a critical setting for proper management. If you set this wrong, PTL Trader will open either too big or too small positions.'''

@@ Line 79: / Line 79: @@
 The profit estimate threshold is absolute, in USDs. So setting it to 50 means never enter pair trade if the potential estimate is lower than 50 USD.
-'''This rule is most useful to small investors with accounts lower 100,000 USD, to prevent opening pair trades with insignificant absolute profit potential.'''
+'''This rule is most useful to small investors with accounts lower 25,000 USD, to prevent opening pair trades with insignificant absolute profit potential.'''
 The estimated profit potential is displayed in the PTL Trader in real-time, even if the rule is not enabled.

← Older revision		Revision as of 14:25, 11 May 2013
Line 67:		Line 67:
	* Type: Entry Signal Filter		* Type: Entry Signal Filter
	* Support: PTL Trader		* Support: PTL Trader
		+
		+	This is an additional entry signal filter. This rule tries to estimate (in real-time) the potential profit of position as it was opened at the moment and closed at exit threshold immediately. So it tries to "simulate" the trade and estimate the profit.
		+	The problem is the profit can be any, because pair trading model works with the single metric (Z-Score), but you trade two instruments. So there is an infinite number of combinations how and where prices can go to cross the model exit threshold.
		+
		+	This particular "profit estimator" simulates that both prices drop proportionally to the positive direction to match the exit threshold rule.
		+
		+	Please never really think that your trade will actually gain the estimated profit! It could, but most likely it will not. Better, consider this as the "best screnario" profit it can happen.
		+
		+	The purpose of this filter is to prevent opening pair trades on pairs exhibiting low absolute standard deviation at the moment. It is nice the pair Z-Score is crossing your entry threshold, but if the "best scenario" profit potential is just 10 USD, it is probably better to avoid trading until the pair is more volatile, especially considering your would pay at least 4 USD on commissions. It would be foolish to waste slots and risk the trade for 6 USD of net profit in such a case.
		+
		+	The profit estimate threshold is absolute, in USDs. So setting it to 50 means never enter pair trade if the potential estimate is lower than 50 USD.
		+
		+	'''This rule is most useful to small investors with accounts lower 100,000 USD, to prevent opening pair trades with insignificant absolute profit potential.'''
		+
		+	The estimated profit potential is displayed in the PTL Trader in real-time, even if the rule is not enabled.
		+
		+	Remark: The estimate can be negative for Residual Model. This is not a bug - it is correct. It may happen in some situations if the A coefficient is negative. For Ratio model, the estimate is always positive.
		+
		+	(todo: more info about the estimate algorithm)