STATISTICAL ARBITRAGE STRATEGY
Correlation is a very interesting phenomenon in different areas of life, and more particularly in finance. This phenomenon is characterized by a coefficient which varies from + 1 through 0 to – 1.
When this coefficient is close to 1, we say that the two markets are positively correlated, and if it is close to -1, we say that they are negatively correlated.
This phenomenon is mainly due to several similarities between the two markets, in particular when they work in the same sector, they contain the same associates.
However, sometimes this correlation breaks, we say that we have a divergence, and during this situation we must react rapidly to prepare for a new strong convergence, this method is called statistical arbitrage or futures spread.
Investors classified Statistical arbitrage into three categories, commodity product spreads, intramarket spread (calenderspread) and intermarket spread.
This strategy concerns especially intermarket spread, it applies to the largest financial index, the S& P500 and the NASDAQ.
Using an indicator called SpreadDistance developed by our team, we can detect the divergence in order to enter Long with the NQ and Short with ES, and vice versa.
BACKTEST - Cumulative Net Profit
Thanks to NinjaTrader, we have built a detailed backtest for our strategy using Market Repaly and other tools.
The Cumulative Net Profit curve represents a strictly positive slope. This demonstrates the effectiveness of the stratetgy.
The backtest shown here is for one Month because we calculate on eashTick .
BACKTEST - Sumarrry
Within a month, the strategy was able to reach around 2800 $, with a maxdrawdown of 5200 $. It’s true that the strategy is a bit risky, but it always remains consistent.
It is also noted that the weighting between the two markets obliges us to trade 3 ES contracts against 2 NQ contracts, that is to say a total of 5 contracts at the same time.
OUR PHILOSOPHY OF PROFIT
The money management principle applied here is that the trade exit is conditioned by the sum of the Unrealized profit loss of the two markets. if it is greater than 300 we are a winner if it is less than 2500 we are a loser (scarce case).
As Daily Profit loss shows us, almost all days are positive which proves the strength of this approach.
Watch the strategy demonstrator video! It shows a trade from signal detection until trade exit!
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Statistical Arbitrage STRATEGY PLANS
SEMI - ANNUAL
2500 $ One Time