Pairs Trading

Pairs trading is a popular strategy among traders, and it involves finding two stocks that have a high degree of similarity in their historical price movements. We built a system for auto pairs trading American stocks. In this blog post, we will discuss a method for building a pairs trading system using American stocks listed on the Nasdaq and the NYSE.

The first step in building this system is to use web scraping techniques to collect data on the stocks listed on the Nasdaq and NYSE. This can be done by using a web crawler that is written in Java and accessing the official Nasdaq website. The crawler will collect information on the stocks that are currently traded on the Nasdaq and NYSE, including their Industry, Sector, and historical trading data.

Once the data has been collected, we can use a technique called the Cartesian product to match the stocks pairwise. By comparing the historical price movements of the stocks, we can find the pairs of stocks that have the highest degree of similarity. This step can be done using Java or Python.

After finding the most similar pairs of stocks, we can use a technique called backtesting to evaluate their performance. Backtesting involves simulating the trading of the stocks over a period of time and analyzing their performance. For example, if the price of one stock in the pair deviates significantly from the other, we can take a long or short position on the underperforming stock. Once the prices of the stocks return to their mean, we can close the position. This step can be done using Python.

After backtesting, it is important to manually review the pairs that performed well. This step involves analyzing the fundamentals and future prospects of the stocks to determine if they are likely to experience large price movements. After this step, we can select several pairs of stocks that performed well and form a portfolio.

Finally, we can use the Interactive Brokers API to automate the trading of the pairs. This step involves writing code in Java to monitor the price movements of the stocks in real-time and automatically execute trades based on pre-determined conditions. Additionally, we can record the trading history and use tools such as Spring MVC and Mysql to analyze and display the trading information.

In conclusion, pairs trading is a popular strategy among traders, and it involves finding two stocks that have a high degree of similarity in their historical price movements. In this blog post, we discussed a method for building a pairs trading system using American stocks listed on the Nasdaq and the NYSE. This method involves web scraping data, matching the stocks pairwise, backtesting the performance, manual review, and automating the trading using the Interactive Brokers API. It's important to note that this is a complex strategy and should be done after thorough research and understanding. 

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