Hi,
I'm currently trying to contstruct and backtest a pairs trading system using spread betting.
Let's say I bet £10 per penny share move.
Now, because I am trading pairs of shares, which involves scaling the prices of the two shares to be approximately equal, do i need to scale my bet for the second equity in the pair?
For example:
In the pair: cable&wireless vs. vodaphone I scale the price of vodaphone by 1.5 times: So if i enter a £10 bet going Long on cable&wireless, should I enter a £15 short position on vodaphone?
In backtesting this appears to make less profit than simply entering a £10 bet on both, however I think the risk on one position is increased when scaling is ignored.
Can somebody please confirm
Thanks
I'm currently trying to contstruct and backtest a pairs trading system using spread betting.
Let's say I bet £10 per penny share move.
Now, because I am trading pairs of shares, which involves scaling the prices of the two shares to be approximately equal, do i need to scale my bet for the second equity in the pair?
For example:
In the pair: cable&wireless vs. vodaphone I scale the price of vodaphone by 1.5 times: So if i enter a £10 bet going Long on cable&wireless, should I enter a £15 short position on vodaphone?
In backtesting this appears to make less profit than simply entering a £10 bet on both, however I think the risk on one position is increased when scaling is ignored.
Can somebody please confirm
Thanks