Alpha Trading: Profitable Strategies That Remove Directional Risk by Perry J. Kaufman

Author:Perry J. Kaufman
Language: eng
Format: mobi, epub
Tags: Investments & Securities, Finance, Futures, General, Pairs Trading, Business & Economics
ISBN: 9780470529744
Publisher: Wiley
Published: 2011-03-08T00:00:00+00:00

In Chapter 3, we introduced the high-distortion filter, or distortion ratio. This is a simple way of recognizing when two markets are acting very differently based entirely on the relative position sizes needed to equalize the volatility of the two legs. The implication is that when the two legs have very different volatilities, then:

The leg with the lower volatility and the larger position may have an unusually big move, causing an unusually large profit or loss relative to the other leg.

Or the leg with the lower volatility and the larger position may not move at all, thus not providing the market-neutral effect that we are trying to achieve.

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