This is a discussion on Trading Using Statistical Arbitrage vs. Traditional Technical Analysis within the Technical Analysis forums, part of the Methods category; Originally Posted by surfeur Thanks IFeelFree for your feedback. How many bars you use for find your cointegration ? 2500 ...

Dec 20, 2015, 8:56pm   #9
Joined Oct 2015
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 Originally Posted by surfeur Thanks IFeelFree for your feedback. How many bars you use for find your cointegration ? 2500 5000? more? So if i understand right, you don't use the weight found with johansen procedure but you use kalman filter ? If Yes there are differences ? the weight of johansen isn't enough good?
I'm using 5 years of weekly data, so 5 x 52 = 260 data points. I also have a daily version of the software which uses 5 x 252 = 1260 data points. However, the returns of the daily version are just slightly higher than the returns of the weekly version, but it has higher transaction fees, and also would make a lot more demands on my personal time, so I'm using the weekly version.

I take the weights from the Johansen procedure and I use them as the initial values (the "seed" values) for the Kalman filter. (It turns out the Kalman filter is sensitive to initial values, so this is important.) The advantage of the Kalman filter is that it gives the statistically optimal weights for each period, rather than just a constant weighting. It is more dynamic, and seems to better accommodate changing market conditions. The bottom line is that it dramatically improves the performance of the algorithm. That's why I'm getting >50% AYR.

You can read examples in Chan's book. For example, using a triplet of cointegrated ETFs, EWA-EWC-IGE, he obtains only a 12.6% average yearly return (AYR) using the Johansen weights with a simple mean-reversion algorithm. However, adding a Kalman filter to the simpler EWA-EWC cointegrated pair, he obtains the much higher 26.2% AYR. I know most people prefer to keep things simple, but sometimes a more sophisticated algorithm really does perform better.

 Dec 20, 2015, 9:35pm #10 Joined Jun 2004 Prices are not random under specific conditions.....if you know The conditions to look for and can execute the trades at that time you will always make money trading __________________ Free Indicators http://www.trade2win.com/boards/fore...ml#post2443624 G8 Indexes [/B]http://www.trade2win.com/boards/fore...ml#post2559846 3 Duck Corriehttp://www.trade2win.com/boards/fore...ml#post2773474
Dec 20, 2015, 9:38pm   #11

Joined Jun 2004
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 Originally Posted by IFeelFree Thanks, Mr. Charts. I suspect that my approach is bit too mathematical for most traders, but the math gives me confidence that I have a sound basis for making my trades. There's at least one other trader on this forum who's also using a cointegration/mean-reversion strategy. I'm looking at other strategies as well, such as cointegrated vector autoregressive models and momentum strategies. As long as I'm making good returns, I'm going to continue with this.
That's the secret to being a trader .....be confident in your edge .....

Respect
N

Dec 21, 2015, 12:10am   #12
Joined Oct 2015
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 Originally Posted by NVP Prices are not random under specific conditions.....if you know The conditions to look for and can execute the trades at that time you will always make money trading
It's not that prices are random. It's that our knowledge of the causes of price movements are limited. (I can't predict price movements with perfect accuracy.) Therefore, any price movements I can't predict are random to me.

Presumably, all price movements have causal mechanisms, but we can't know all of them. What we can't explain is "random".

Aug 2, 2016, 7:57pm   #13

Joined Aug 2014
Hi IFeelFree,
did you perform any cointegration testing over FX spot pairs? The main issue with ETFs is data hovewer FX data are quite easily within reach

Thanks!

Tomas

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