Of course, some simply follow Kelton's strategy and if they size and manage their positions properly then can do very well. Needless to say, the parity and those two fib lines will also be levels to watch for a bullish reversal. Trade safe, trade well.
I also found these notes useful for anyone else reading: Out of curiosity, what was the time period you used? And are you trading any of these relations? I'm skeptical of simple two-factor cointegration in FX but still undecided about multi-factor. I was using 1 minute data. No I'm not trading any of them. They tend to be longer term in nature and my bent is toward shorter term strategies that can produce a smoother equity curve.
When applied to smaller amounts of data cointegration tends to fall apart out of sample from my experience. My strategies are more similar to the ideas discussed in this thread based on empirical pairs trading. But I must admit I'm spending much more time in development than in trading.
But the idea that you can apply coefficients to time series and create a more normalized spread line is my takeaway. If any are interested in trading using cointegration based methods I suggest taking a look at Ernie Chan's blog: It sounds like you've got the interpretation figured out, but in case anyone else is needing a bit more step by step examples, see these two on interpretation of the Johansen Cointegration results: So, what do we conclude by looking at the output?
We start going down one row at a time, and compare the test statistic with the critical values. It could still be that there is more than 1 cointegrating vector. So, lets move on to the 2nd row. But it could be possible that there are 2 or more cointegrating vectors. We move on to the 3rd row now, and get rejected again. When the critical value is exceeded, it means that the null hypothesis cannot be rejected. When the test statistic exceeds the critical value we cannot say that there are zero cointegrating relations.
So we conclude that there may be 1 cointegrating relation or more , and we continue with the next row until we get a rejection of the null hypothesis. I've been thinking about this post a lot. This is an important concept and I thank richardtannermassingill for making it. It's sort of the inconvenient stat arb truth! But knowing it can be a means for building more stable strategies that work over the long term through time series engineering. I've always felt that the most important thing is first creating a deterministic system - one that is predictable a priori.
For instance, a sine wave is predictable. In system development having a static mean and being bounded static standard deviation is more than enough to make the outcome predictable. But prices don't come that way so they must be manipulated through a bit of engineering to create a better spread upon which a simple mean reversion strategy can be applied. Of course, some simply follow Kelton's strategy and if they size and manage their positions properly then can do very well.
Let's do the calculation So the signals from cointegration pair trading are equivalent to just looking at a long run SMA of the cross-rate and trading when there is a deviation. When the cross trends, the strategy will break down because you're always waiting for the cross to return to it's long-term SMA. This is why I don't have great hope for pair trading in FX.
Just trade a long-term SMA of the cross and be done with it. But if we jazz things up with multivariate cointegration then things could get interesting. Very interesting analysis and presentation! I can confirm the results you show in the picture.
This is essentially a visual representation of what I posted previously:. In this case a better spread is one that is more stationary, bounded, and predictable. It's funny really, that so many spend so much time developing and testing systems, when they should be spending their time with the data, and then just applying simple systems to that engineered data.
I am interested in the best way to make an indicator for an EA that can be backtested over 10 years to test this stuff. The best I can come up with is based upon an MA, where we just measure the distance of price from it and use a long period. Be sure to check out our Bitcoin Trading Guide if you're new to cryptocurrencies! We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Bitcoin prices may continue to fall.
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I have expanded the scope of this thread to cover other pairs on my watch list. This will help me be efficient with my time and give members a variety of pairs they may me interested in.
As usual members' opinions and contributions will be appreciated. I have been trading this pair for a while and I like the fact that it respects technical indicators, e. MAs, and is fairly predictable. Yesterday, I closed a sell trade on this pair because I wanted to reduce the number of my open trades.
I am still bearish on the pair, as a short-term swing trader. The trend on the HTFs I use - 4 hourly, daily and weekly - and the RSI readings are aligned with a further southward push for the pair.
The shooting star formed on Tuesday on the daily chart was reinforced by a strong bearish candle yesterday. As the price action has just left the DPP, it will be good to wait for a pull back to around the DPP to enter a sell trade.
This analysis is presented for educational purpose and is the opinion of this analyst; it does not represent an investment advice. Good luck in your trade. The outlook on EU is still bearish. Any northern move is likely going to be a short correction to test the bearish spike around 1.
I am still bearish on EU although there is room for correction northward to the immediate resistance on the 4-hour chart. Even though the 4-hour time frame indicates a disposition southwards, the outlook is still unclear on the daily chart, and both the weekly and monthly tfs tend to support a northward direction. Imo, the best action for a swing trader will be to wait for a clearer market disposition. On the 4-hour tf, the bullish candles have been big and the corrective bearish candles have been very small for a long while.
Much likely the bulls will still have their way this week. Hi TrapTheMarket, there's a special section of the forum for analysis threads of this kind which really don't belong in "Forextown":
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