Statistical Arbitrage Pairs Trading - Long-Side Only — Strategy by piirsalu
By piirsalu
Performance Metrics
- Author: piirsalu
- Symbol: NASDAQ:GOOGL
- Timeframe: 1 day
- Net P&L: +1,875.78 USD (+18.73%)
- Win Rate: 71.4%
- Profit Factor: 2.898
- Max Drawdown: 148.63 USD (1.41%)
- Total Trades: 133
- Sharpe Ratio: −0.081
Description
This strategy implements a simplified statistical arbitrage ("stat arb") approach focused on mean reversion between two correlated instruments. It identifies opportunities where the spread between their normalized price series (Z-scores) deviates significantly from historical norms, then executes long-only trades anticipating reversion to the mean.Key Mechanics:1. Spread Calculation: The strategy computes Z-scores for both instruments to normalize price movements, then tracks the spread between these Z-scores.2. Modified Z-Score: Uses a robust measure combining the median and Median Absolute Deviation (MAD) to reduce outlier sensitivity.3. Entry Signal: A long position is triggered when the spread’s modified Z-score falls below a user-defined threshold (e.g., -1.0), indicating extreme undervaluation of the main instrument relative to its pair.4. Exit Signal: The position closes automatically when the spread reverts to its historical mean (Z-score ≥ 0).Risk management:Trades are sized as a percentage of equity (default: 10%).Includes commissions and slippage for realistic backtesting.