Not wanting to spam you but this might be helpful for anyone who has really struggled to find affordable retail software that truly does the job of testing and assessing the tradeability of cointegrated pairs.

My partner and I used to model our cointegration pair trades in excel but hit limits. So we decided to build a more flexible and faster tool for release in Q4 this year (and will be commercialising it).

Obviously we are bullish about the product. But anyone joining the beta (starting next month on the current schedule) will be able to judge how comprehensive it is for themselves.

Details are at arb-maker.com where we can also be contacted.

Regards,

Rawdon

- Lumi

Just thought I’d let you know about a free Pair Trading Tool. Absolutely no cost.

http://catalystcorner.com/index.php?m=pair_tool

Trade long/short simultaneously. Outputs statistical and fundamental analysis.

Here’s the logic I followed when I wrote the article:

Say I assume I’m originally working with $1000 that I want to divide up equally over the 2 positions, so $500 going long on LOW and $500 shorting HD. The position returns are:

LOW: $500 x $26.42 / $29.42 = $448.40
HD: $500 x $38.98 / $31.79 = $613.09

Therefore I said I’d “invested” $1000 but made $613.09 + $448.40 = $1061.49 or 6.1%.

But there’s another way to think about this (perhaps the correct way) and it goes like this. On the day I enter the pairs trade I begin by shorting $500 worth of HD. This puts $500 into my account. I can then use that $500 to go long with LOW.

In the end I wind up having $61.49 left over after I sell the long and cover the short, but I never invested a penny of my own money. In that case perhaps a “return on investment” is meaningless.

- Lumi

Although i`m struggling to find information on the equivalent dollar amounts to place on each trade in the pair.

In your post you say “Therefore our equal dollar positions averaged out to a 6.1% gain.”. How are you arriving at this figure? And how do you calculate the equivalent dollar values for the pairs.

You could use the ratio on the day that you enter the trade – but this ratio obviously changes as the trade goes on.

Any info you can provide would be useful!

Thanks
Chris

I use Matlab for my own analysis. This works great if you’re an engineer or engineering student who already has a license. Otherwise you might want to investigate using Excel or OpenOffice Calc. Good luck!