Statistical Arbitrage
Statistical Arbitrage description
Statistical arbitrage, or Stat Arb, is a quantitative investment strategy that aims to profit from pricing inefficiencies between related securities. These inefficiencies often emerge from the statistical mispricing of one or more assets about the underlying “true” value of these assets, which can be estimated using statistical models.
The strategy involves the simultaneous buying and selling of a portfolio of securities. A common approach is pairs trading, where two securities historically moving in tandem become misaligned. When one security is relatively overvalued, and the other is undervalued, the trader short-sells the overvalued security and buys the undervalued one. The expectation is that the prices will converge again in the future, yielding a profit.
Statistical arbitrage relies heavily on complex mathematical models, high-speed computers, and data analysis tools to identify and exploit trading opportunities. The strategy also assumes that the prices will return to a historical or predicted normal, a process known as mean reversion.
Although statistical arbitrage aims to maintain a market-neutral position (thus minimizing exposure to systematic risk), it is not risk-free. Some risks associated with this strategy include model risk, liquidity risk, and execution risk. Also, because many statistical arbitrage strategies involve high-frequency trading, they can be sensitive to transaction costs.
As of my knowledge cutoff in September 2021, statistical arbitrage is primarily used by hedge funds and other institutional investors. For most individual investors, the technical requirements for implementing this strategy are prohibitive. Learn more...
Statistical arbitrage instruments & Orders
Enabled - controls if the instrument is allowed to trade or not.
Symbol 1, Symbol 2 – instrument names.
Lot size 1, Lot size 2 – lot size to be traded.
Digits – how much digits instrument has in decimals.
S/L – hidden stop loss for the position.
T/P – hidden take profit for the position.
Min profit – how much profit the order should get (in points) for system to start trailing on this position.
Trailing distance – the distance (in points) that is used for trailing on position.
Trailing units - Currency / Present . The software can calculate trailing stop in account currency or like percent from instrument's price.
Order lifetime – the maximum time the position can be opened.
Strong correlation - correlation between instruments at which or at a higher the software can open a deal.
Max Spread slow 1, Max Spread slow 2 - maximal allowed spread for the particular symbol.
Comment - internal identifier. The comment should be different for similar instruments.
Correlation period - the number of bars for correlation calculation.
MA period - moving average period.
Spread STD - standard deviation. The standard deviation is always positive or zero. The standard deviation is small when the data are all concentrated close to the mean, exhibiting little variation or spread. The standard deviation is larger when the data values are more spread out from the mean, exhibiting more variation.
Curr corr - current correlation between 2 instruments.
Min corr - minimal correlation between instruments that was detected during software was running.
Max corr - maximal correlation between instruments that was detected during software was running.
Curr Spread Slow 1, Curr Spread Slow 2 – current spread for instrument 1 and instrument 2.
Right mouse menu
Columns - show or hide columns from the grid.
Clear Max diff - clear maximal correlation between instruments that was detected during software was running
Add pair - add pair of instruments for the statistical arbitrage trading
Remove pair -remove the select pair of instruments from the grid
Save instrument settings - save selected instruments settings
Open lock on the selected instrument - open the lock on the selected instruments manually
Close lock on the selected instrument - close the lock on the selected instruments manually
Charts - open charts menu
Symbol 1, Symbol 2 - show chart for symbol 1/ symbol 2.
Indicators - show correlation indicator for the selected instruments.
OHLC history - open OHLC (open, high low, close) history menu.
Load from file - load the history for the selected instruments from the file.
Load from server - load the history for the selected instruments from the BJF Trading Group history server.
Clean - Clean all historical data for the selected instruments