Statistical Arbitrage with Cointegration for Beginners

Pairs trading using statistical arbitrage from looking at cointegrated pairs is one of my favourite tools to explore. Here you will learn about ZSCORE and how it applies to pairs trading for statistical arbitrage. The explanation for this supports total newbies and may even help those who know some theory but never really understood it intuitively.
Essentially when the ZSCORE reaches an unusually high or low number of standard deviations, there could be a great opportunity to exploit for a pairs trade. There are many ways to potentially use such info which will likely explore in other videos. You may even consider building an arbitrage trading bot.
Luckily, statistical arbitrage does not have the same drawbacks as vanilla arbitrage due to how cointegration is used to identify swings that have enough liquidity for many retail traders to capitalise on.
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[@kangChihLun]

This tutorial is pure gold , thanks wizard for sharing this!

[@aayush841]

Exactly as you said , I'm really really blown up , never thought that maths can be so amazingly amazing , thanks for sharing valuable knowledge with us

[@TheJakeRobinson]

This was off the hook! very compelling. I'll be reviewing this a few times...

[@CryptoWizards]

Glad you found it helpful. I love this stuff. Will interview my cousin hopefully soon as he is a bag of knowledge!

[@airbound1779]

You do our lord and savior’s, The Invisible Hand, work. Keep the videos coming

[@MrMo0x]

was thinking about building a tool to agreggate this kind of data and see you've done it. I'm really hype I'm going to look more onto it tomorrow

[@CryptoWizards]

Amazing! Thanks Max!!

[@ark3286]

Thanks man, very insightful!

[@vavi_lw]

An amazing video once again 👏🏼👍🏿

[@CryptoWizards]

Thank you so much 😀

[@davidfnck]

I downloaded the data for both pairs and for the same time period and tried to plot similar graphs, but I got different graphs, is there a normalization of the prices here? Or is it some other operation?

[@randomdude79404]

Great video , perhaps in an upcoming video you can go through a jupyter notebook implementing this ? show some backtesting even

[@CryptoWizards]

Really good idea man. Thank you!

[@sam0812]

Can pairs trading still be used if the prices of each asset never actually cross in past years but they have a mega high correlation and are cointegrated

[@user-bo2rf5gc3d]

How to get benefit of this what to long and what to short ??

[@nationbuilding5319]

Also have you thought about putting tooltips (hover) over the buttons etc to give explanation?

[@CryptoWizards]

You're absolutely right. I need to add tooltips. Thanks man.

[@tudatostrader]

Which book do you recommend from E.P. Chan and who is the person you mention after him? Great content! Thanks

[@CryptoWizards]

Thanks Marcell. Actually I have another recommendation for you now. It is Algorithmic Trading. There are some others I'll be mentioning soon on the channel which am looking at as think you'll really get a lot like I am from them.

[@nationbuilding5319]

Again amazing content. How can I learn this stuff? I'm a coder so I understand how to code it but I don't know the theory. I've been learning quant finance and watching your videos but I want to be able to master it like you. Can you recommend books and/or courses? Eagerly waiting for your response 😀

[@airbound1779]

A good start is Advances in Active Portfolio Management

[@nationbuilding5319]

Cool, I will check it out.

[@CryptoWizards]

A totally share your enthusiasm for this kind of stuff. Absolutely, definitely read some of Ernest P Chans content and also follow the Hudson Thames videos on KZbin (my cousins channel). This guy is next level. Am working on making some courses at the moment so have taken this question seriously in factoring that into the course planning.

[@CryptoWizards]

Thanks friend!

[@nationbuilding5319]

Cool, thanks all!

[@aldolabuonora]

hi, thanks for your videos, can you use it also for stocks? or only with cripto

[@CryptoWizards]

Absolutely, this works well for stocks on a daily timeframe.

[@schrodingerscat3912]

everything changed after I discovered cointegration. I ended up finishing a degree in Computer Science

[@CryptoWizards]

Wowzers! You should start a channel too!

[@Bible_Boost]

Pls can I know the site you use to check this please today is my first time of watching you video

[@hectorferreruela4936]

how do i can get this tool?

[@jmoz]

Nice bit of dev. How is it coded? I must note you’re making the mistake speaking in certainties with this. Pairs is dangerous due to the tail event risk. It all looks great until some rare event happens eg an Elon pump or huge short unwind which would blow out the correlation and potentially liquidate the trade.

[@Gurneet2006]

Awesome content and very well explained. I have been using your tool to make some test trades and its perfect for trading the spread using z-score. However I am unable to understand which coin to short and which coin to long? as sometimes I do the opposite and the end results in the loss of that particular spread %age?

[@CryptoWizards]

Thanks brother! Hope you got the email response. You'll really like the content coming soon applying ML to the spread.

[@Gurneet2006]

@@CryptoWizards looking forward to get an explanation on how to decide which asset to long and which asset to short and how to find?

[@camberra2944]

I have recently discovered your channel. I am beginning to study what statistical arbitrage is. I still don't understand what are the difficulties why cointegration is a profitable strategy (in the short and long term) and why there are no paid software dedicated to this (if there is one, let me know, I haven't found anything at the moment).

[@JohnEnergy2012]

Ia this available for Forex as well?

[@CryptoWizards]

Hi John - yes it is now. Just select "FMP" as the provider.

[@rickycheung9063]

In previous video, you use zscore on token velocity. But in this video, you use zscore on spread. Which one is more reliable and shown on cryptowizard?

[@CryptoWizards]

Great question, I use Zscore, but a video is coming out soon for you to test both. I seem to get good results either way.

[@charlesfranklin7977]

Good day, please I've been trying to subscr!be on the wizards website but it keeps declining my card. It'll be nice if they can add more payment methods like flutterwave, paystack and more. so we can subscribe from Africa at ease.. thanks!!