Pair Trading: Using Cointegration method by HanByul P

HanByul P INVESTOR

| Reward Discussion

Hi Jingw, I backtested your pair trading algo using 'cointegration' method. I changed yours to: 1). Weekly trading (trade every Monday at 10 am), 2) Shorten lookback periods. Please see the attached backtest below. I found that there's no trading between 04.10.2014 and 10.04.2014 (for about six months) (Please see below 'Trade' logs.). I checked if the algo generated any signals, and yes it did during the period (Please see the below 'Logs'.). And later 10.04.2014, trades resumed and stopped again on 10.23.2014. Why is this happening? The only reason I could guess is that it should reached to some sort of capped (max) leverage and then the system automatically stopped trading for new signals. Once the max leverage gets resolved for new trading, it resumed trading. Is this right? Can you give me some clear explanations on ths? Thanks :)

# Trade Logs



2014-04-08T04:00:00Z	QQQ	82.54548728	167	4	Filled	13785.09637

2014-04-08T04:00:00Z	XLK	33.51219591	-174	4	Filled	-5831.122089

2014-04-09T04:00:00Z	QQQ	83.52851585	337	4	Filled	28149.10984

2014-04-09T04:00:00Z	XLK	33.85942393	-352	4	Filled	-11918.51722

2014-04-10T04:00:00Z	QQQ	84.68502005	677	4	Filled	57331.75857

2014-04-10T04:00:00Z	XLK	0	-707	4	0	0

2014-04-11T04:00:00Z	QQQ	0	1358	4	Invalid	0

2014-04-11T04:00:00Z	XLK	0	-1419	4	Invalid	0

2014-04-12T04:00:00Z	QQQ	0	1359	4	Invalid	0

2014-04-12T04:00:00Z	XLK	0	-1420	4	Invalid	0

2014-04-15T04:00:00Z	QQQ	0	1359	4	Invalid	0

2014-04-15T04:00:00Z	XLK	0	-1391	4	Invalid	0

2014-04-16T04:00:00Z	QQQ	0	1359	4	Invalid	0

2014-04-16T04:00:00Z	XLK	0	-1391	4	Invalid	0

2014-04-17T04:00:00Z	QQQ	0	1357	4	Invalid	0

2014-04-17T04:00:00Z	XLK	0	-1389	4	Invalid	0

2014-04-18T04:00:00Z	QQQ	0	1357	4	Invalid	0

2014-04-18T04:00:00Z	XLK	0	-1389	4	Invalid	0

2014-04-22T04:00:00Z	QQQ	0	1356	4	Invalid	0

2014-04-22T04:00:00Z	XLK	0	-1359	4	Invalid	0

2014-05-09T04:00:00Z	QQQ	0	1358	4	Invalid	0

2014-05-09T04:00:00Z	XLK	0	-1249	4	Invalid	0

2014-10-04T04:00:00Z	QQQ	95.38213835	-1342	4	Filled	-128002.8297

2014-10-04T04:00:00Z	XLK	37.67476284	1679	4	Filled	63255.92681

2014-10-11T04:00:00Z	QQQ	91.33321646	-7	4	Filled	-639.3325152

2014-10-11T04:00:00Z	XLK	35.988964	8	4	Filled	287.911712

2014-10-14T04:00:00Z	QQQ	90.66485376	-18	4	Filled	-1631.967368

2014-10-14T04:00:00Z	XLK	35.93213932	22	4	Filled	790.507065

2014-10-15T04:00:00Z	QQQ	88.67913848	-36	4	Filled	-3192.448985

2014-10-15T04:00:00Z	XLK	35.1839477	45	4	Filled	1583.277647

2014-10-16T04:00:00Z	QQQ	87.59425989	-73	4	Filled	-6394.380972

2014-10-16T04:00:00Z	XLK	34.87141196	92	4	Filled	3208.1699

2014-10-17T04:00:00Z	QQQ	90.07398238	-147	4	Filled	-13240.87541

2014-10-17T04:00:00Z	XLK	35.59119124	186	4	Filled	6619.961571

2014-10-18T04:00:00Z	QQQ	90.04492314	-291	4	Filled	-26203.07263

2014-10-18T04:00:00Z	XLK	35.45860032	368	4	Filled	13048.76492

2014-10-21T04:00:00Z	QQQ	92.54401846	-576	4	Filled	-53305.35464

2014-10-21T04:00:00Z	XLK	36.16890882	732	4	Filled	26475.64126

2014-10-22T04:00:00Z	QQQ	0	-1140	4	Invalid	0

2014-10-22T04:00:00Z	XLK	36.73715562	1448	4	Filled	53195.40134

2014-10-23T04:00:00Z	QQQ	0	-1140	4	Invalid	0

2014-10-23T04:00:00Z	XLK	0	1448	4	Invalid	0

2014-10-24T04:00:00Z	QQQ	0	-1135	4	Invalid	0

2014-10-24T04:00:00Z	XLK	0	1442	4	Invalid	0

2014-10-25T04:00:00Z	QQQ	0	-1134	4	Invalid	0

2014-10-25T04:00:00Z	XLK	0	1441	4	Invalid	0

2014-10-28T04:00:00Z	QQQ	0	-1134	4	Invalid	0

2014-10-28T04:00:00Z	XLK	0	1446	4	Invalid	0

2014-10-29T04:00:00Z	QQQ	0	-1130	4	Invalid	0

2014-10-29T04:00:00Z	XLK	0	1441	4	Invalid	0

Logs:

2014-04-08 00:00:00 Converted OrderID: 23 into a MarketOnOpen order.

2014-04-08 00:00:00 Converted OrderID: 24 into a MarketOnOpen order.

2014-04-08 00:00:00 Trade II : QQQ ,  -167.0 ,  XLK ,  [-174.59564091]

2014-04-09 00:00:00 Converted OrderID: 25 into a MarketOnOpen order.

2014-04-09 00:00:00 Converted OrderID: 26 into a MarketOnOpen order.

2014-04-09 00:00:00 Trade II : QQQ ,  -337.0 ,  XLK ,  [-352.32773046]

2014-04-10 00:00:00 Converted OrderID: 27 into a MarketOnOpen order.

2014-04-10 00:00:00 Converted OrderID: 28 into a MarketOnOpen order.

2014-04-10 00:00:00 Trade II : QQQ ,  -677.0 ,  XLK ,  [-707.79190956]

2014-04-11 00:00:00 Converted OrderID: 29 into a MarketOnOpen order.

2014-04-11 00:00:00 Converted OrderID: 30 into a MarketOnOpen order.

2014-04-11 00:00:00 Trade II : QQQ ,  -1358.0 ,  XLK ,  [-1419.76575063]

2014-04-12 00:00:00 Converted OrderID: 31 into a MarketOnOpen order.

2014-04-12 00:00:00 Converted OrderID: 32 into a MarketOnOpen order.

2014-04-12 00:00:00 Trade II : QQQ ,  -1359.0 ,  XLK ,  [-1420.81123351]

2014-04-15 00:00:00 Converted OrderID: 33 into a MarketOnOpen order.

2014-04-15 00:00:00 Converted OrderID: 34 into a MarketOnOpen order.

2014-04-15 00:00:00 Trade II : QQQ ,  -1359.0 ,  XLK ,  [-1391.80580346]

2014-04-16 00:00:00 Converted OrderID: 35 into a MarketOnOpen order.

2014-04-16 00:00:00 Converted OrderID: 36 into a MarketOnOpen order.

2014-04-16 00:00:00 Trade II : QQQ ,  -1359.0 ,  XLK ,  [-1391.80580346]

2014-04-17 00:00:00 Converted OrderID: 37 into a MarketOnOpen order.

2014-04-17 00:00:00 Converted OrderID: 38 into a MarketOnOpen order.

2014-04-17 00:00:00 Trade II : QQQ ,  -1357.0 ,  XLK ,  [-1389.75752413]

2014-04-18 00:00:00 Converted OrderID: 39 into a MarketOnOpen order.

2014-04-18 00:00:00 Converted OrderID: 40 into a MarketOnOpen order.

2014-04-18 00:00:00 Trade II : QQQ ,  -1357.0 ,  XLK ,  [-1389.75752413]

2014-04-22 00:00:00 Converted OrderID: 41 into a MarketOnOpen order.

2014-04-22 00:00:00 Converted OrderID: 42 into a MarketOnOpen order.

2014-04-22 00:00:00 Trade II : QQQ ,  -1356.0 ,  XLK ,  [-1359.83141118]

2014-05-09 00:00:00 Converted OrderID: 43 into a MarketOnOpen order.

2014-05-09 00:00:00 Converted OrderID: 44 into a MarketOnOpen order.

2014-05-09 00:00:00 Trade II : QQQ ,  -1358.0 ,  XLK ,  [-1249.52169536]

2014-10-04 00:00:00 Converted OrderID: 45 into a MarketOnOpen order.

2014-10-04 00:00:00 Converted OrderID: 46 into a MarketOnOpen order.

2014-10-04 00:00:00 Trade I : QQQ ,  -1342.0 ,  XLK ,  [-1679.68154203]

2014-10-11 00:00:00 Converted OrderID: 47 into a MarketOnOpen order.

2014-10-11 00:00:00 Converted OrderID: 48 into a MarketOnOpen order.

2014-10-11 00:00:00 Trade I : QQQ ,  7.0 ,  XLK ,  [ 8.83882976]

2014-10-14 00:00:00 Converted OrderID: 49 into a MarketOnOpen order.

2014-10-14 00:00:00 Converted OrderID: 50 into a MarketOnOpen order.

2014-10-14 00:00:00 Trade I : QQQ ,  18.0 ,  XLK ,  [ 22.79430496]

2014-10-15 00:00:00 Converted OrderID: 51 into a MarketOnOpen order.

2014-10-15 00:00:00 Converted OrderID: 52 into a MarketOnOpen order.

2014-10-15 00:00:00 Trade I : QQQ ,  36.0 ,  XLK ,  [ 45.58860991]

2014-10-16 00:00:00 Converted OrderID: 53 into a MarketOnOpen order.

2014-10-16 00:00:00 Converted OrderID: 54 into a MarketOnOpen order.

2014-10-16 00:00:00 Trade I : QQQ ,  73.0 ,  XLK ,  [ 92.4435701]

2014-10-17 00:00:00 Converted OrderID: 55 into a MarketOnOpen order.

2014-10-17 00:00:00 Converted OrderID: 56 into a MarketOnOpen order.

2014-10-17 00:00:00 Trade I : QQQ ,  147.0 ,  XLK ,  [ 186.15349048]

2014-10-18 00:00:00 Converted OrderID: 57 into a MarketOnOpen order.

2014-10-18 00:00:00 Converted OrderID: 58 into a MarketOnOpen order.

2014-10-18 00:00:00 Trade I : QQQ ,  291.0 ,  XLK ,  [ 368.50793013]

2014-10-21 00:00:00 Converted OrderID: 59 into a MarketOnOpen order.

2014-10-21 00:00:00 Converted OrderID: 60 into a MarketOnOpen order.

2014-10-21 00:00:00 Trade I : QQQ ,  576.0 ,  XLK ,  [ 732.0129035]

2014-10-22 00:00:00 Converted OrderID: 61 into a MarketOnOpen order.

2014-10-22 00:00:00 Converted OrderID: 62 into a MarketOnOpen order.

2014-10-22 00:00:00 Trade I : QQQ ,  1140.0 ,  XLK ,  [ 1448.77553817]

2014-10-23 00:00:00 Converted OrderID: 63 into a MarketOnOpen order.

2014-10-23 00:00:00 Converted OrderID: 64 into a MarketOnOpen order.

2014-10-23 00:00:00 Trade I : QQQ ,  1140.0 ,  XLK ,  [ 1448.77553817]

2014-10-24 00:00:00 Converted OrderID: 65 into a MarketOnOpen order.

2014-10-24 00:00:00 Converted OrderID: 66 into a MarketOnOpen order.

2014-10-24 00:00:00 Trade I : QQQ ,  1135.0 ,  XLK ,  [ 1442.42125949]

2014-10-25 00:00:00 Converted OrderID: 67 into a MarketOnOpen order.

2014-10-25 00:00:00 Converted OrderID: 68 into a MarketOnOpen order.

2014-10-25 00:00:00 Trade I : QQQ ,  1134.0 ,  XLK ,  [ 1441.15040376]

2014-10-28 00:00:00 Converted OrderID: 69 into a MarketOnOpen order.

2014-10-28 00:00:00 Converted OrderID: 70 into a MarketOnOpen order.

2014-10-28 00:00:00 Trade I : QQQ ,  1134.0 ,  XLK ,  [ 1446.51044912]

2014-10-29 00:00:00 Converted OrderID: 71 into a MarketOnOpen order.

2014-10-29 00:00:00 Converted OrderID: 72 into a MarketOnOpen order.

2014-10-29 00:00:00 Trade I : QQQ ,  1130.0 ,  XLK ,  [ 1441.40811949]

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HanByul P

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Jing Wu

242.2k Pro ,

Hi Hanbyul, since here you use schedule Events method, then you can set your equity resolution to minute and move all the code in Ondata to Action function in Schedule Event(see the attached backtest below). As for daily resolution, it will calculate the order quantity at midnight 00:00, it is not accurate since market is not open and there are also margin and cash requirements for short selling. That might be the reason for many invalid orders with huge quantity in your backtest.

HanByul P

8.1k Pro ,

Hi Jingw, I see. With 'Minute' mode, the result looks quite different now. Thank you :)

HanByul P

8.1k Pro ,

Jingw, Sorry, I have one more last question. I thought that 'Daily' mode in schedule function is based on all the close prices of each day. So the most recent 'close' is yesterday's close price. Then, from what you mentioned, "...As for daily resolution, it will calculate the order quantity at midnight 00:00, it is not accurate since market is not open...", I don't understand why the calculation of 'quantity' is NOT accurate. At midnight, isn' t this based on the all the 'close' of each day? or different ? I guess I am missing something here. Please give me more explanation. Thank you :)

Jing Wu

242.2k Pro ,

Hanbyul, when using minute resolution and scheduled event, the quantity is calculated at scheduled time 10:00 am, the order is submitted at the same time. But when using daily resolution and scheduled event together, quantity is calculated at 00:00, the order is submitted at 110:00 am.There is a gap between them.

HanByul P

8.1k Pro ,

Hi Jingw, Thanks for your explanation. In addition, I investigated some based on your explanation. I was confused by 'Daily' mode in 'History' function and 'Daily' mode in 'AddSecurity'. When we use 'History' function with 'Daily' resolution, the most recent price (close) is yesterday's close price. So when we use 'AddSecurity("XLK", Resolution.Daily)' or 'AddSecurity("XLK", Resolution.Minute)', we get the same historical prices for our defined lookback periods. In other words, although we use 'AddSecurity' with different resolution modes ('Daily' vs 'Minute'), I think that all the calculations we want are based on the same historical data, meaning we get the same result from the calculations.

However, I missed this part: When we use 'AddSecurity("XLK", Resolution.Daily)', all the orders are filled with the most recent (price) data, which is in our case yesterday's close price. For example, if our orders are generated at 3:55pm everyday, our orders get filled with yesterday's close price (How can we get the yesterday's close price at 3:55pm today? It's impossible and totally non-sense !!!). But if we use 'AddSecurity("XLK", Resolution.Minute)', all the orders are filled with the most current price, which is in our case the price at 10am today (Not Yesterday's price !). This is more realistic ! I think this huge difference between two modes made totally different results.

In conclusion, I think we all should use 'AddSecurity("Symbol", Resolution.Minute)' to get more realistic results. Or we should add most current minute-based data to our historical data (if it's 'Daily' mode.). This is very basic but I think it is very important too. Thank you Jingw.

Jared Broad

Pro ,

Correct Han -- I think if using daily data you should only submit MarketOnOpen orders; as the event is triggered after the trading data is completed and market/market on close orders will both be too late. Submitting a MOO order at midnight will be filled accurately the same day; but you still won't get any information on it until midnight when that daily bar closes (but at least it'll be fill with the expected prices).

HanByul P INVESTOR

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