Monday, October 29, 2012
TLT / XLF Pair Trade - Part III
For the technically oriented-----All these pair trades are based on the the z-score, a log ratio examination of the relationship between the current standard deviations of the pair components. One of the criteria that makes an ideal pair trade is when the thresholds of the z-score reversals are clearly defined. Using a topographic analysis of all the trades over the past 6 months shows that this is clearly the case with the TLT/XLF trades. In fact, if you apply this type of analysis to most the popular pair trades only a very few will show this type of isolated "sweet spot".