ANALYSIS: Cointegration, Correlation and Technical
Strategy: Principle http://www.bitcoinprice.mobi/prediction/
Trading pairs JNPR vs CSCO which has moved from its correlation can be done based on cointegration or technical analyzing the prices of the stock pairs and tries to profit from the mean-reversion proces.
Cointegration (right chart): look for the divergence pairs that have moved away from each other and then back together in a regular pattern:
1. Identify a gap.
2. Make a trade assuming the stocks will return to their correlated path
The strategy is therefore to identify when the “gap” is created and to trade in the assumption that there is a high probability the gap will close or narrow.
This pairs have a high positive correlation between them, meaning that both stocks historically tend to move together. Generally because they are from the same industry sector and traded in the same market, so the same factors impact them.
of the spread (left chart):
Cisco move together very closely and has a maximal correlation with Juniper. This means it's profitable when the relative value between the two assets is perturbed from equilibrium, you can take a contrarian position and profit from the spread trading as the prices revert back to their long-run mean.
The trade should be opposite to the “gap”. CSCO has performed better than JNPR , in order to close the “gap” JNPR will now perform better.