Pair Trading > Models, Algorithms & Approaches

Explain Entry and Exit of Ratio Model in Depth

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Michael Merrill:
I am trying to wrap my head around the ratio pairs model.  When entering does the z-score have to be, say +/- 1.5, or are you using Bollinger bands around the Delta and if the Delta crosses 1.5 SD you enter?  Same for exit logic. 

Thanks

admin:
Ratio model - we use Bollinger Bands around the price ratio (p1/p2) and we enter on 2 SD cross by default.

Actually mathematically it is the same as entering on Z-score = 2, because Z-score is just delta/sd (in this model).

We plan to put detailed documentation of both models to wiki, but we are really short of time at the moment.

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