Pair Trading > Technical Details

Entry Mode

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Michael Merrill:
Can someone please explain to me what entry mode is?  I am slightly confused by uptick and downtick.

Thanks

admin:
uptick - position is entered when the z-score (or spread) crosses the entry threshold immediately
downtick - when z-score (or spread) crosses the entry threshold, nothing happens - system waits further until the z-score is again below the threshold (crosses down) and THEN it opens the position

this is currently used only in Ratio model, Residual model works with uptick mode only

admin:
examples:
uptick: https://www.pairtradinglab.com/backtests/UgPhP80KmGrXopYc
downtick: https://www.pairtradinglab.com/backtests/UgPhaxeFRzdGWDMm

see the difference on the images attached...dots = places where position is opened

Mike Murphy:
Do you have any comparative data on the effectiveness of Uptick as against downtick entry. It strikes me that one would expect downtick entry to result in lower drawdowns.

admin:
I don't think there is any significant advantage in either one.

In my live portfolio, I don't even wait for the uptick anymore, I enter position whenever I can as long the Z-score exceeds the threshold (it behaves like the uptick mode, but in addition it has advantage if you trade more pairs at the same time and you have to allocate your account margin in a smart way). In PTL Trader this mode is called Simple. It is not available in backtest system, because for single pair, it behaves quite like the uptick mode.

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