A few words first:
Two or more time series are cointegrated if they share a common stochastic drift(wikipedia).Practically,this means that their residuals are mean-reverting.
This method can be used for any two(or more) time series,whether these are forex,stocks, etc,as long as they are cointegrated.
Cointegration trading has been used excessively in the past decades by hedge funds and banks.This means that,if used properly,it can be a very powerful tool in our trading arsenal.
There have been many threads so far discussing ways to trade using cointegration.I have read many of them but i havent found yet any where a solid method is developed. And this is due to the fact that it hasnt been tested which pairs are cointegrated and which are not.
This is where this thread will emphasize.On ways to test for cointegration and how we can use it to trade.
To the main point now:
There are 3 programs that i know of that can be used to check whether two time series are cointegrated:
Matlab:Probably the best of them.This is used by the pros.Unfortunately it requires extensive technical and mathematical expertise and training that i dont have.I would be happy to have someone posting here that knows how to use Matlab and maybe can help us.
R:This is the software that has been used in the most threads that discuss about cointegration.It is the only on that is free.It also requires some programming skills.I dont have these skills and for this reason i find it a bit difficult to use as i dont know how to check for cointegration,do backtests etc.If you want to learn more about it and how to trade with it please refer to this thread:http://www.forexfactory.com/showthread.php?t=363198
Arb-maker:This is a new and constantly developing software that focuses exactly on how to trade using cointegration.Unfortunately,it isn't yet as developed as Matlab is,but it is extremely user-friendly and is probably the best choice for people with no programing skills like me.I will use this from now on to run my tests,post charts,develop my strategy etc.
This is all for now.Tomorrow,i will write about the exact strategy i will follow and i'll probably attach a trading explorer as well.
Two or more time series are cointegrated if they share a common stochastic drift(wikipedia).Practically,this means that their residuals are mean-reverting.
This method can be used for any two(or more) time series,whether these are forex,stocks, etc,as long as they are cointegrated.
Cointegration trading has been used excessively in the past decades by hedge funds and banks.This means that,if used properly,it can be a very powerful tool in our trading arsenal.
There have been many threads so far discussing ways to trade using cointegration.I have read many of them but i havent found yet any where a solid method is developed. And this is due to the fact that it hasnt been tested which pairs are cointegrated and which are not.
This is where this thread will emphasize.On ways to test for cointegration and how we can use it to trade.
To the main point now:
There are 3 programs that i know of that can be used to check whether two time series are cointegrated:
Matlab:Probably the best of them.This is used by the pros.Unfortunately it requires extensive technical and mathematical expertise and training that i dont have.I would be happy to have someone posting here that knows how to use Matlab and maybe can help us.
R:This is the software that has been used in the most threads that discuss about cointegration.It is the only on that is free.It also requires some programming skills.I dont have these skills and for this reason i find it a bit difficult to use as i dont know how to check for cointegration,do backtests etc.If you want to learn more about it and how to trade with it please refer to this thread:http://www.forexfactory.com/showthread.php?t=363198
Arb-maker:This is a new and constantly developing software that focuses exactly on how to trade using cointegration.Unfortunately,it isn't yet as developed as Matlab is,but it is extremely user-friendly and is probably the best choice for people with no programing skills like me.I will use this from now on to run my tests,post charts,develop my strategy etc.
This is all for now.Tomorrow,i will write about the exact strategy i will follow and i'll probably attach a trading explorer as well.