How to select the two legs of a pair trading?

D

domodo

Hi,all,I'm a new guy on trading,expecially on pair trading,these days I'm considering how to select two legs on commodity futures intramarket pair trading.

for example,there are 7 months contracts on CBOT soybean,if I wanna trade pair intramarket,how to select two months among these seven months and calculate the spread ?

Is there any way to select the two legs of pair trading automatically by a software ?

Regards.
 
Soybean Spreads? If you're bullish, you should tend to buy the "old crop" Summer months and short-sell the "new crop" Fall and Winter months. Vice versa if you're bearish. You can trade them on a one-to-one contract basis.
 
Yes absolutly...I am reading this thread and trying to learn. This style of trading is the most rewarding in yield considering the drawdown.

Michael B.

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Quote from nazzdack:

Soybean Spreads? If you're bullish, you should tend to buy the "old crop" Summer months and short-sell the "new crop" Fall and Winter months. Vice versa if you're bearish. You can trade them on a one-to-one contract basis.
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In your case,the tradable contracts of soybean are 7,8,9,11 contracts,for example,if the spread is regarded as bullish,from your suggestion,which month should I buy,7?and which month should I short,11?

Could I draw a conclusion that,when the direction if the market is defined,all the months would be divided into two parts: old part and new part,and the most liquid month of the parts would be selected to buy/short ? how if the numbers of the parts are odd?

Does a quantitative or mechanical rule to select legs of spread/pair trading ?

regards.
 
you could start by finding the seasonality of each contract. then create a correlation matrix and find high degree pairs. with those pairs find the extremes. if there is demand I could create a report and distribute it for a fee.
 
Trading by seasonality,maybe only several opportunities in a year,and it seems that it couldn't be done automatically....

But still thanks for your tips.

regards.
 
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