Minimum-Profit Thresholds for Cointegrated Pair Trading

Summary

This document explains how to trade a cointegrated pair using entry and exit levels produced by a minimum-profit optimization method. It defines a spread from the two asset prices and a hedge coefficient. When the spread falls below the buy threshold, the rule opens a position that is long asset A and short asset B in specified quantities. When it rises above the sell threshold, it opens the opposite orientation; reaching the close threshold exits an open trade. The design allows only one open trade at a time.

The implementation processes spread observations one at a time, checks for entry signals, records trades, and updates open positions for closure. An example applies the procedure to two named equities and points readers to research notebooks and academic work on optimizing the boundaries. The document describes mechanics and an illustrative historical chart, but supplies no quantified performance evaluation here. Results depend on the quality of the cointegration model, estimated hedge coefficient, chosen thresholds, data timing, and practical trading costs; these considerations are not evaluated in the excerpt.

Key ideas

• The method uses optimized buy, sell, and close thresholds for a spread between two cointegrated assets.
• Crossing the lower threshold opens a long-A, short-B position, while crossing the upper threshold opens the reverse position.
• A shared close threshold exits whichever trade is open.
• The rule processes incoming spread values incrementally and tracks open and closed trades.
• The document gives implementation guidance and references, but no measured strategy performance.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.