Pair Trading > Good & Bad Pairs

Entry / Exit rules

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damiano:
Hello,

I am seeing many backtests on your website, and I would like to know how you calculate the entry/exit of the trades.
I see a big list of operations (example: https://www.pairtradinglab.com/backtests/Ue6COpUMoBh7YGm1)

What do you see (maybe z-score?) to open new positions?

Thank you!

admin:
Yes, Z-Score is used to generate entry/exit signals:

* if Z-Score crosses the Entry Threshold value (positive), we open short pair position
* if Z-Score crosses the Entry Threshold value (negative), we open long pair position
* (for existing position) if Z-Score crosses the Exit Threshold value, we close the pair position
You can choose entry and exit thresholds in the backtest parameters. Default values are:

* entry threshold = 2.0
* exit threshold = 0.0
Try to experiment with these settings.

damiano:
Hi!
thank you for your fast reply.

Ok, but in your backtest how many periods (days) do you use to calculate the second deviation  ?

Because I see a lot of operation so i do not think a very big period. no?

admin:
I assume you mean standard deviation. You can set it yourself, parameter name is "StdDev Period:", default is 15.

damiano:
so if the ratio is above/below the second deviation (+2 or -2) you will execute the trade, right?

Do you think 15 days are enough? maybe the correlation could be broken in these few days, no?

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