Simple trading strategy, but I am having a hard time understanding how to build this. by Roman Gutin

Roman Gutin

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The strategy in abstract form is simple. There are two equities ZOO and POO and I want to test 30 minute bar data.

Let X be the difference in price of POO and ZOO at a given time.

The trading order is going long ZOO and POO in an A:B ratio.

Let C be the cost of that order while ignoring market impact and only considering predicatable costs.

If X > C for the Slice :

execute the trade of going long POO and ZOO in an A:B ratio.

If X = 0

Liquidiate net position.

Close all positions at market close.

Other things:

In the future, I intend to backtest this strategy comparing ZOO to a basket of POO's where the A:B ratio of the order depends on what POO actually is.

In my mind this is a toy example of pairs trading, so I imagine this is extremely simple to implementm, but I am having a hard understanding which modules I need to tweak and custom build.

Thanks in advance to anyone who even read all of this!

Best,

Roman

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Roman Gutin

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Douglas Stridsberg

5.1k Pro ,

What you describe is very simple and a look at the example algorithms should point you in the right direction.

The only complicating factor is your C (trading cost), which you will need to estimate. Typically, the cost of a fill can be broken down into the following blocks:

Bid/ask spread - you can calculate this by looking at the BidPrice and AskPrice of the security objects in question.
Slippage - this is hard to predict but can be estimated as some number of ticks depending on volatility and order size (in relation to average volume traded).
Commission to broker - given how you're simply comparing X and C, I doubt you want to take commission into account, as this depends on the order size.

Once you have calculated C, the rest should be self-explanatory. If not, please go through the Bootcamps, the example algorithms and the documentation.

Erik Bengtson

10.6k Pro ,

If I understand well your strategy is mean reversion of two stocks pairs, here some examples that you can use

https://www.quantconnect.com/tutorials/strategy-library/pairs-trading-copula-vs-cointegration

https://www.quantconnect.com/tutorials/strategy-library/trading-with-wti-brent-spread

Roman Gutin

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