Swan

Swan is a strategy for benefitting from statistical arbitrage.

Also known as relative value trading this algo calculates divergence in correlated stocks to generate trading signals which are direction neutral and nature and low on risk. One stock has to be bought and the other has to be shorted. Major ideas for developing this strategy have been taken from Trading Systems, the 10th module of Varsity.

As this uses an elaborate statistical model, the risk percentage associated is also calculated and displayed alongside. Targets and stop losses are calculated on z scores which are updated on a daily basis.

We recommend a holding period of 20 days for this strategy.

How to Trade?

1. When z score is between 2.5 and 3, short y scrip and go long on x scrip. Exit trade when z score moves to between 1.5 and 2. Keep a stop loss on z score 3.5. Exit trade after 20 days if neither stop loss nor target is hit.

2. When z score is between -3 and -2.5, go long on y scrip and short x scrip. Exit trade when z score moves to between -2 and -1.5. Keep a stop loss on z score -3.5. Exit trade after 21 days if neither stop loss nor target is hit.

3. The value of the quantity of scrip x must be equal to the value of the quantity of scrip y.