Exit Rules for Cointegration-Based Pairs Trades
Summary
The document explores exit choices for a crypto pairs trade entered after finding a cointegrated relationship. The trader reports that cointegration tests can stop indicating a relationship and later signal it again, while a simple exit at zero z-score has sometimes produced a loss. A fixed percentage stop has also failed to work well, with the trader suspecting that it may trigger during temporary divergence before reversion.
The trader is experimenting with percentage stops, zero-z-score exits, take-profit levels, and a sliding stop, but the thread contains no responses or tested solution. It supplies no evidence for choosing a stop distance or deciding how changing cointegration status should affect an open position. The account is limited to crypto on a 30-minute timeframe, so its observations do not establish that any exit rule generalizes to other markets, sampling intervals, or pair construction methods.
Key ideas
- A pair can lose and later regain statistical cointegration while a trade remains open.
- Exiting at a zero z-score may still leave a losing position when the relationship has shifted.
- A tight percentage stop can trigger during divergence before a possible reversion.
- The document lists several candidate exit rules but provides no tested recommendation or comparative evidence.
Tags
Full text
# Exit strategy on cointegrated pairs trading # Exit strategy on cointegrated pairs trading I'm looking for guidance on an exit strategy when using pairs trading & cointegration. I'm able to find two cointegrated pairs, I then enter the trade however once in the trade I found the pairs lose their cointegration (pvalue > 0.05) and then become cointegrated again. Originally I was using the zscore = 0 however I found when the pair lost their cointegration and the became cointegrated again then exiting at zscore = 0 wound up with a losing trade. I'm currently using the stop loss (so with each tick I calculate my percentage PnL) and exit on 0.5% but this is also not proving fruitful, I suspect the stop loss is too tight. I'm looking for guidance on strategies I can use. I'm using crypto's on the 30M timeframe. Here are some I'm toying with: - Exit at x% stop loss. But the question here is what %age should I use? I'm using 0.5% and think it's a bit tight. When I enter at 0.5% my take profit is around 0.5% as well so it's a 1:1 ratio. But I'm finding I enter a trade as the zscore/pairs are diverging and it hits the 0.5% then reverts. - Exit at zscore = 0. However as mentioned above what do I do if the PnL is negative and the pairs lose their cointegration? Some reading I've done says one should exit when the zscore is zero however I've seen pairs go in and out of cointegration so don't want to exit too early. - Something else? I'm using a combination of a sliding stop loss, zscore = 0 and take profit at x% Please help.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.