Equity pairs trading ratios

F

FastandFurious

when doing a pairs trade, how do you look at the charts and what you trade?

For example, the price difference between XOM-CVX is minimal

69.18(XOM)-68.96(CVX) would you trade it 1:1, meaning buy and sell 100 shares each?

However, for other pairs such as MRK-PFE, the price difference is almost double

30.70(MRK)-16.93(PFE) would you trade it 1:2, meaning to equate the notional value, for every 100 shares of MRK you buy, you sell 200 shares. And on the chart, you would display "MRK-2*PFE"

Any help is appreciated
 
It's not as simple as you are assuming.
Suggest learning about hedge ratios and co-integration a bit.

I recommend picking up Chan's quantitative trading book for a nice layman's description and practical examples that can be replicated.
 
Quote from dtrader98:

It's not as simple as you are assuming.
Suggest learning about hedge ratios and co-integration a bit.

I recommend picking up Chan's quantitative trading book for a nice layman's description and practical examples that can be replicated.
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i thought equating the notional values should be enough?
 
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