SpreadTrade - Distance (ps4 ver. 2)

4. Sept. 2019

This script implements a rebrushed distance-based pair trading strategy. In this strategy, normally they trade the difference between the prices of two instruments. This difference is also called spread. Here, however we’ll trade the difference between two time frames of one instrument. And that's the main trick. Common procedure consists of the following steps:

1. Select two CORRELATED stocks. Here we'll use the same instrument in different TFs.
2. Generate the spread by calculating the difference between the prices/instruments. For distance based pair trading, we need to (rescale the data first and then) check the distance between them.
3. Define the logic to trade the spread and generate the trading signals. In this example we’ll calculate the rolling mean and rolling standard deviation of the spread. Whenever the spread goes above a rolling mean by one standard deviation, we’ll short the spread expecting the mean reversion behavior to hold true. And whenever the spread goes below its rolling mean by one standard deviation, we’ll go long on the spread.

Mind that the meaning of the orange and blue signals depends on whether tf variable is smaller or larger than the built-in timeframe.multiplier variable, i.e. tf of the chart.

For details see analyticsprofile.com/algo-trading/pair-trading-part-1-code-distance-based-pair-trading-strategy-in-r/

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4. Sept. 2019

Versionshinweise

Added 4 more distance measures.

4. Sept. 2019

Versionshinweise

Added Mahalanobis distance measure.

4. Sept. 2019

Versionshinweise

Minor fix.

4. Sept. 2019

Versionshinweise

Minor fix - typos and norm function.

4. Sept. 2019

Versionshinweise

Minor fix.