Did you see that SBI and Yes Bank is not of equal quantity? The trick is striking the ideal ratio.
If you like HDFC and SBI combo, do some research and find out ideal ratio to trade. Also let us know the ratio.
Further, when we initiate the trade in SBI and Yes Bank, the difference between the two scrips should widen to profit. The difference increases when both scrips move in the direction of each trade. Or one scrip stagnates and other scrip moves in its direction. But if both scrips reverses direction, or one scrip stagnates and other scrip moves in opposite direction of the trade, we close the trade on SL and reverse it. Here again the idea is - we are just following the rule of widening the gap.
Sometimes it so happens that both converge relentlessly and does not give us room to widen the gap. The SL protects us in such situations.
If you like HDFC and SBI combo, do some research and find out ideal ratio to trade. Also let us know the ratio.
Further, when we initiate the trade in SBI and Yes Bank, the difference between the two scrips should widen to profit. The difference increases when both scrips move in the direction of each trade. Or one scrip stagnates and other scrip moves in its direction. But if both scrips reverses direction, or one scrip stagnates and other scrip moves in opposite direction of the trade, we close the trade on SL and reverse it. Here again the idea is - we are just following the rule of widening the gap.
Sometimes it so happens that both converge relentlessly and does not give us room to widen the gap. The SL protects us in such situations.
From what i read, in pair trading or mean reversion strategies a certain analysis leaning on heavy side of math is done to identify to identify the pairs that have high co-relation.
I just wanted to confirm my understanding. So in this case the key ratio (equal) is the quantity in both pairs and no other parameter.
Will track this thread.
Thanks