Author Topic: Standard deviation  (Read 2461 times)

marc-antony foreman

  • Newbie
  • *
  • Posts: 2
  • Karma: +0/-0
Standard deviation
« on: October 13, 2021, 06:04:27 am »
Hello, does the standard deviation moving average match the  moving average of the ratio?

For example if I select EMA for the ratio, does the standard deviation use the EMA as well or does it use SMA for that caclulation.



  • Administrator
  • Sr. Member
  • *****
  • Posts: 336
  • Karma: +13/-0
    • Pair Trading Lab
Re: Standard deviation
« Reply #1 on: October 13, 2021, 06:19:14 am »
From the documentation of ratio model:

* we trade pair of stocks A, B, having price series A(t), B(t)
* we need to calculate ratio time series R(t) = A(t) / B(t)
* let's apply moving average of type T with period Pm on R(t) to get time series M(t)
* let's apply standard deviation with period Ps on R(t) to get time series S(t)
* now we can create Z-score series Z(t) as Z(t) = (R(t) - M(t)) / S(t), this time series can give us z-score to signal trading
* decision directly (in reality we have two Z-scores: Z-scoreask and Z-scorebid as they are calculated using different prices, but for the sake of simplicity let's now pretend we don't pay bid-ask spread and we have just one Z-score)

About your question about the MA type - nope we always use SMA for underlying MA calculation in stddev.