Quote from luxor:
Would you ignore correlation and just look at high cointegration?
Yes. According to PTF, cointegration doubles the average profit per pair trade.
I have started backtesting with the new version and I do see that many of my best actual pairs trades have higher cointegration value vs my losing pairs. This is just a quick reaction and I have more analysis to do.
Here is what PTF says about cointegration and mean reversion (and there is lots about it if you google it):
"Co-integration(CI) is similar to
correlation(CR) in that it measures a
relationship between 2 stocks, or etf's,
options, futures, currencies.
Why CI is better the CR is because
CI measures the tendency for a pair
to revert back to it's mean, where CR
only measures the similarity in a relationship
between the 2 instruments.
To use a simple analogy to illustrate this
point, consider this;
A man and a women are walking down
the road together, this is correlation,
however the women stops to look in
a shop window and the man keeps walking,
then the women runs to catch up to the
man, co-integration measures would
recognize this relationship has a
tendency to return to the mean(average),
whereas in this case correlation would
have broke down because the women stopped."
