Description
The Pair Trading Short strategy is the short signal counterpart in Domenico D'Errico's pair trading system. By design, this strategy is to complement Pair Trading Long on another chart (a detached chart window or a cell in the chart grid). Make sure you apply it to the secondary symbol you've specified in the Pair Trading Long strategy.
The Pair Trading Short strategy adds simulated orders based on the same price ratio and its short and long moving averages calculated in Pair Trading Long, however, the direction of the orders is the opposite. Conditions are different for each of the three price ratio trending modes.
- Trend following mode. In the trend following mode, the price ratio shows a clear trend: either bullish or bearish. Selecting this mode will have the strategy add a sell to open simulated order when the fast moving average crosses above the slow one. A buy to close simulated order will be added once the fast average crosses below the slow one.
- Mean reversion mode. In the mean reversion mode, the price ratio shows continuation of a preceding trend after a retracement of about 50%. Selecting this mode will have the strategy add a sell to open simulated order when the price ratio crosses below its fast moving average. Conversely, a buy to close simulated order will be added when it crosses above.
- Trend-and-pullback mode. In the trend-and-pullback mode, the price ratio shows numerous pullbacks in the main trend. Selecting this mode will have the strategy add a sell to open simulated order when the price ratio crosses below the fast moving average while being above the slow one. A buy to close simulated order will be added once the price ratio crosses above the fast average while being below the slow one.
Input Parameters
| Parameter | Description |
|---|---|
first symbol
|
Defines the primary symbol for the price ratio. This is also the symbol to apply the Pair Trading Long strategy to. |
fast length
|
Defines the length of the fast simple moving average. |
slow length
|
Defines the length of the slow simple moving average. |
mode
|
Select a suitable trending mode of the price ratio. |
Further Reading
1. "Pair Trading With A Twist" by Domenico D'Errico. Technical Analysis of Stocks & Commodities, December 2016.
Backtesting is the evaluation of a particular trading strategy using historical data. Results presented are hypothetical, and there is no guarantee that the same strategy implemented today would produce similar results.
Technical analysis is not recommended as a sole means of investment research.
For educational purposes only. Not a recommendation of a specific security or investment strategy.