Trading Pairs with Excel / Python -Advance Statistical Tools for Trading & backtesting in Python/Google Sheets : [PDF Download]

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“If two companies are similar, operate in the same sector/country/conditions then their stock prices tend to move together. We check this relation with statistical tools like correlation, ADF test etc. as discussed earlier. Any change in the business landscape will affect the stock prices of both the companies.

If stock price of one company deviate away from the stock price of the other without any event/incident then on such days, the price difference of both of the companies deviates. We look for such deviations to identify good trading opportunities.

When such deviations arise we take long position in one stock and short position in another then we wait for the pair to move towards the mean value of price difference. We need to stay long and short of the same Rupee/Dollar value. This is also called ‘Rupee/Dollar Neutrality’.

It means value of long position (price multiplied by quantity) should be equals to the value of short position. Before implementing any strategy we should backtest our logics on past data to check the profitability.”

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