Cointegration Spread Z-Scores for Market-Neutral Pairs Trading
Summary
The document introduces a statistical-arbitrage approach to pairs trading. It argues that simple price correlation does not ensure a stable relationship between two assets, and presents cointegration as a basis for expecting a pair’s spread to revert toward its historical level. The proposed indicator calculates the difference between the assets’ natural-log prices and standardizes that spread with a rolling z-score, making deviations measurable across instruments with different price scales.
It also describes synchronizing time series for two symbols in an MQL5 terminal. The text provides no entry thresholds, exit rules, backtest, or performance evidence, and ends before explaining how to execute the trade. Cointegration alone does not guarantee reversion, and the document does not specify how to test stability, estimate a hedge ratio, account for costs, or control risk. The indicator description is therefore an outline of analytical components rather than a complete or validated trading system.
Key ideas
- Simple correlation does not establish that the spread between two assets will remain stable.
- The proposed spread is the difference between the natural logarithms of two asset prices.
- A rolling z-score expresses the spread’s deviation from its recent baseline in standard-deviation units.
- The indicator is intended to support market-neutral pairs analysis, but the document gives no trade rules or test results.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.