H-Statistics for Renko and Kagi Pairs Trading
Summary
The H-strategy uses Renko or Kagi turning points to study how far a price or spread typically moves before reversing. It defines an H threshold, marks extrema and the later times when a move of that size confirms a turn, then measures the count of reversals, the powered distances between extrema, and average distance per reversal as H-volatility. Unlike conventional pairs methods, it does not estimate a long-run spread mean.
At confirmed turns, a momentum strategy follows the latest direction, while a contrarian strategy bets on reversal. The document compares their theoretical profits through H-volatility relative to twice the threshold: higher values favor momentum and lower values favor contrarian trading. It proposes selecting asset pairs by constructing log-price spreads, setting each threshold from spread variability, and ranking pairs by H-inversion. The claims are theoretical: the text says mean-reverting processes should have lower H-volatility, but provides no empirical results, transaction-cost treatment, or robustness analysis. Threshold choice and construction type also affect the signals.
Key ideas
- Renko and Kagi constructions identify extrema and confirm them after a price move reaches a chosen threshold.
- H-inversion counts confirmed directional changes, while H-volatility averages the powered distances between turning points.
- Momentum and contrarian signals are framed as alternatives based on whether H-volatility is above or below twice the threshold.
- The proposed pairs process ranks log-price spreads using H-inversion after setting thresholds from spread variability.
- Theoretical profitability claims do not account for transaction costs or provide empirical validation in this document.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.