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Andrew,
I once did all the math and can't remember it now, but three things
come to mind. The first is that changes in the ratio also gives you
the percentage change in the value of a portfolio consisting of the
spread. Thus you can look at the ratio and use that to calculate
expected returns, volatilities, Sharpe coefficients and so on.
Secondly, the ratio is supposed to be stationary, thus mean reverting
by implication, which makes it a nice indicator on its own to trade
with. The moment it shoots up, sell the thing and wait for it to
return - sort of - in practise there are always complications. The
spread is not stationary (but could be if A and B were e.g. interest
rates and not prices).
Finally the ratio does not have a dimension. If you calculate the
spread, you are still stuck with that. This sometimes help with the
spread (e.g. if you trade CFDs where the CFD and spread will be in the
same dimension) but also can make things complicated in say the
commodity market, where one contract may be in bushels and another in
tonnes and you want to get rid of the dimension. The spread then
suffers quite a bit.
Sometimes it helps to take the log of A and B and then calculate the
spread, or calculate the ratio and then take the log. They are
actually similar
ln A / B = ln A - ln B
This is not bounded.
Many times you actually want something that is bounded, again giving
preference to the ratio. If you simply buy A, then note that it is
limited by 0, the price cannot go negative (sometimes it just feels
like that). The spread has this 'unboundedness' problem but not the ratio.
Regards
MG Ferreira
TsaTsa EOD Programmer and trading model builder
http://www.ferra4models.com
http://fun.ferra4models.com
--- In equismetastock@xxxxxxxxxxxxxxx, "Andrew Tomlinson"
<andrew_tomlinson@xxxx> wrote:
> Hi MG
>
> You suggest that A/B has 'additional benefits for trading'. What do
you see
> those as? My preference on composites is to use combinations that I can
> actually trade, which usually means A - B in some form. A/B avoids going
> negative simply by compressing the lower end of the scale, rendering
an area
> of output insensitive to changes in the data. This is similar to the
problem
> with 'bounded' indicators, like stochastics.
>
> Using A-B creates two issues - the horizontal shift (an arbitrary number
> seems to do fine in most applications) and the trade ratio (trickier - I
> like to volatility adjust).
>
> Interested in your thoughts
> Andrew
>
>
>
> -----Original Message-----
> From: equismetastock@xxxxxxxxxxxxxxx
[mailto:equismetastock@xxxxxxxxxxxxxxx]
> On Behalf Of mgf_za_1999
> Sent: Wednesday, September 28, 2005 6:26 AM
> To: equismetastock@xxxxxxxxxxxxxxx
> Subject: [EquisMetaStock Group] Re: Metastock Composite - Help Needed
>
> Hi Mehul,
>
> I assume you have two tickers, say A and B. Now I assume you
calculate the
> spread or difference between these two, thus you create a composite
that is
> simply
>
> A - B
>
> and this has problems, as it sometimes takes on negative values.
You need
> to deal with these and that is why you posted the original message.
>
> What I suggest is that you calculate the ratio
>
> A / B
>
> rather, this will always be positive and also has additional
benefits for
> trading, depending on what A and B is.
>
> Anyhow, hope this is clear.
>
> Regards
> MG Ferreira
> TsaTsa EOD Programmer and trading model builder
http://www.ferra4models.com
> http://fun.ferra4models.com
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, "mehul07941681195"
> <mehul07941681195@xxxx> wrote:
> > Hi
> >
> > Thanks for your msg, i am quite new to metastock so do not understand
> > what you have said, could you take some time to explain further ?
> >
> > my msn is indexarb@xxxx
> >
> > would really appreciate your help
> >
> > thanks
> >
> > mehul
> >
> >
> >
> >
> >
> >
> >
> >
> > --- In equismetastock@xxxxxxxxxxxxxxx, mgf_za_1999 <no_reply@xxxx>
> > wrote:
> > > I assume you are using the spread, try to use the ratio between the
> > > two. This will guarantee positive values for one and has a lot of
> > > other benefits as well.
> > >
> > > Regards
> > > MG Ferreira
> > > TsaTsa EOD Programmer and trading model builder
> > > http://www.ferra4models.com http://fun.ferra4models.com
> > >
> > > --- In equismetastock@xxxxxxxxxxxxxxx, "mehul07941681195"
> > > <mehul07941681195@xxxx> wrote:
> > > > Hi
> > > >
> > > > I have created a composite security in metastock using 2
> > securities,
> > > > however as the composite sometimes has negative values i can not
> > > > backtest any indicators as they do not like negative values.
> > > >
> > > > Does anyone know a way around this ? ie is there a way to add 100
> > > > infront of all the data or another solution ?
> > > >
> > > > Sample data file from the downloader.
> > > >
> > > > Thanks in advance for your help, my msn is indexarb@xxxx
> > > >
> > > > 6.02001
> > > > 4.99000
> > > > 0.69000
> > > > 1.55001
> > > > 2.43000
> > > > 6.55000
> > > > 6.65000
> > > > 6.98000
> > > > 7.68000
> > > > 3.75000
> > > > 3.68000
> > > > 4.38000
> > > > 5.06000
> > > > 4.37000
> > > > 4.33000
> > > > 3.94000
> > > > 3.91000
> > > > 3.82999
> > > > 4.01000
> > > > 4.48000
> > > > 4.40000
> > > > 3.38000
> > > > 2.70000
> > > > 2.50000
> > > > 1.80000
> > > > 0.85000
> > > > 0.83000
> > > > -1.08000
> > > > -0.18999
> > > > -1.60000
> > > > -0.72001
> > > > -3.88000
> > > > -3.52000
> > > > -4.19000
> > > > -3.25999
> > > > -3.59000
> > > > -4.64000
> > > > -4.17000
> > > > -3.21999
> > > > -4.37000
> > > > -7.46000
> > > > -6.51000
> > > > -5.78000
> > > > -5.91000
> > > > -6.57000
> > > > -6.05000
> > > > -5.46000
> > > > -5.56000
> > > > -6.50000
> > > > -6.00000
> > > > -5.64000
> > > > -4.48999
> > > > -2.60000
> > > > -3.11000
> > > > -1.48000
> > > > -1.01001
> > > > -1.66000
> > > > -2.15001
> > > > -2.77000
> > > > -3.85000
> > > > -3.87000
> > > > -3.27999
> > > > -3.83000
> > > > -2.71000
> > > > -0.27999
> > > > 0.57001
> > > > 3.02000
> > > > 2.68999
> > > > 3.47000
> > > > 4.62000
> > > > 7.49000
> > > > 4.34000
> > > > 4.18999
> > > > 4.55000
> > > > 5.08000
> > > > 3.08000
> > > > 3.73000
> > > > 2.40000
> > > > 5.17000
> > > > 5.93001
> > > > 5.55001
> > > > 5.05999
> > > > 4.42000
> > > > 5.31000
> > > > 4.80999
> > > > 6.17000
> > > > 7.35001
> > > > 6.32000
> > > > 5.23000
> > > > 6.58000
> > > > 5.32000
> > > > 7.62000
> > > > 7.31999
> > > > 7.09000
> > > > 7.49000
> > > > 9.41001
> > > > 9.17000
> > > > 8.18000
> > > > 7.01000
> > > > 6.67001
> > > > 6.97001
> > > > 6.86000
> > > > 8.85000
> > > > 6.68001
> > > > 7.07000
> > > > 8.10000
> > > > 8.63000
> > > > 6.47000
> > > > 6.68000
> > > > 5.45999
> > > > 5.97001
> > > > 6.70000
> > > > 5.57999
> > > > 5.94000
> > > > 6.62000
> > > > 7.27000
> > > > 7.99001
> > > > 8.55000
> > > > 7.77999
> > > > 8.44999
> > > > 6.41999
> > > > 5.64000
> > > > 4.42000
> > > > 6.08999
> > > > 5.64000
> > > > 4.39001
> > > > 4.54000
> > > > 4.69000
> > > > 4.02999
> > > > 3.30000
> > > > 3.59000
> > > > 3.38000
> > > > 2.85000
> > > > 4.31000
> > > > 4.97000
> > > > 4.21000
> > > > 3.54000
> > > > 2.09999
> > > > 1.02000
> > > > 1.47000
> > > > 0.83000
> > > > 1.58000
> > > > -0.45000
> > > > 0.24000
> > > > 0.69000
> > > > 0.74000
> > > > 1.02000
> > > > 2.53999
> > > > 4.60000
> > > > 3.54999
> > > > 4.08001
> > > > 5.15999
> > > > 5.77000
> > > > 5.44000
> > > > 5.63000
> > > > 5.93000
> > > > 5.38000
> > > > 5.23000
> > > > 5.83000
> > > > 4.96999
> > > > 6.05000
> > > > 5.20000
> > > > 4.89000
> > > > 5.15000
> > > > 4.71001
> > > > 4.84999
> > > > 4.64000
> > > > 5.39000
> > > > 6.46000
> > > > 5.98000
> > > > 7.00000
> > > > 8.73000
> > > > 10.9600
> > > > 8.51001
> > > > 9.27999
> > > > 9.86000
> > > > 8.82999
> > > > 8.64000
> > > > 8.68999
> > > > 5.79000
> > > > 7.21000
> > > > 7.32001
> > > > 6.39999
> > > > 6.31999
> > > > 5.95000
> > > > 5.86000
> > > > 5.35000
> > > > 5.10001
> > > > 5.43000
> > > > 6.12000
> > > > 5.65000
> > > > 6.99000
> > > > 7.18000
> > > > 7.07000
> > > > 7.47001
> > > > 7.10000
> > > > 6.69001
> > > > 6.71000
> > > > 6.00000
> > > > 6.82001
> > > > 7.52000
> > > > 6.03999
> > > > 8.64999
> > > > 8.43000
> > > > 8.18999
> > > > 8.09000
> > > > 7.07000
> > > > 8.41000
> > > > 8.93000
> > > > 7.97000
> > > > 8.81000
> > > > 7.88000
> > > > 7.22000
> > > > 8.55000
> > > > 8.62001
> > > > 7.80000
> > > > 7.28000
> > > > 7.99000
> > > > 7.81000
> > > > 8.95000
> > > > 10.4300
> > > > 9.66999
> > > > 8.99001
> > > > 8.48000
> > > > 9.96000
> > > > 10.1100
> > > > 9.48000
> > > > 9.60000
> > > > 9.41000
> > > > 9.67999
> > > > 8.98000
> > > > 9.65000
> > > > 9.43000
> > > > 9.46000
> > > > 8.14999
> > > > 8.27000
> > > > 8.27000
> > > > 8.89000
> > > > 8.13000
> > > > 7.77000
> > > > 6.36000
> > > > 3.61001
> > > > 1.94000
> > > > 0.98999
> > > > 1.40000
> > > > 2.20000
> > > > 1.35999
> > > > 1.30000
> > > > 1.39000
> > > > 1.68000
> > > > 0.94000
> > > > 1.43000
> > > > 0.68000
> > > > -1.21000
> > > > -0.32000
> > > > -0.06000
> > > > 0.77000
> > > > 1.45001
> > > > 0.43999
> > > > 1.14000
> > > > -0.75999
> > > > -2.37000
> > > > -2.96000
> > > > -1.78000
> > > > -2.91000
> > > > -3.41000
> > > > -3.20000
> > > > -3.53000
> > > > -3.83000
> > > > -4.18000
> > > > -5.21001
> > > > -6.30001
> > > > -5.84000
> > > > -4.10000
> > > > -5.08000
> > > > -4.68999
> > > > -4.50999
> > > > -4.42001
> > > > -4.55000
> > > > -7.24000
> > > > -7.02000
> > > > -7.83000
> > > > -7.29000
> > > > -8.17000
> > > > -8.86000
> > > > -8.48001
> > > > -7.92000
> > > > -7.95000
> > > > -7.52000
> > > > -6.14999
> > > > -7.46999
> > > > -9.49001
> > > > -10.2600
> > > > -10.0400
> > > > -9.73000
> > > > -9.87000
> > > > -8.64999
> > > > -9.26999
> > > > -9.59000
> > > > -10.2400
> > > > -9.30001
> > > > -9.05999
> > > > -10.4500
> > > > -10.8700
> > > > -12.6400
> > > > -11.1200
> > > > -8.25999
> > > > -9.69001
> > > > -10.6800
> > > > -11.7100
> > > > -12.4300
> > > > -11.8500
> > > > -11.7600
> > > > -11.2800
> > > > -7.36000
> > > > -7.60999
> > > > -7.12000
> > > > -6.12000
> > > > -6.79000
> > > > -7.21000
> > > > -8.89000
> > > > -9.46000
> > > > -8.59000
> > > > -7.90999
> > > > -7.16000
> > > > -6.59001
> > > > -6.96000
> > > > -6.58999
> > > > -5.72000
> > > > -5.94000
> > > > -6.88000
> > > > -6.79000
> > > > -6.17000
> > > > -7.34000
> > > > -7.04000
> > > > -7.63000
> > > > -7.35000
> > > > -8.99999
> > > > -8.82000
> > > > -8.47000
> > > > -5.98000
> > > > -5.81999
> > > > -6.40000
> > > > -6.95000
> > > > -8.03000
> > > > -7.57000
> > > > -7.46001
> > > > -7.01000
> > > > -7.18000
> > > > -5.95000
> > > > -5.92001
> > > > -4.62000
> > > > -4.83000
> > > > -4.96000
> > > > -4.55000
> > > > -3.80000
> > > > -5.61999
> > > > -4.50999
> > > > -4.63000
> > > > -5.60000
> > > > -7.02999
> > > > -7.49000
> > > > -5.94000
> > > > -6.27000
> > > > -7.37000
> > > > -7.66001
> > > > -7.18000
> > > > -7.06000
> > > > -5.90000
> > > > -5.20000
> > > > -5.67000
> > > > -2.24000
> > > > 0.20000
> > > > 1.38000
> > > > -0.31001
> > > > 0.57000
> > > > 1.08001
> > > > 1.23000
> > > > 2.06000
> > > > 2.46000
> > > > 3.15000
> > > > 2.42000
> > > > 2.50000
> > > > 1.57000
> > > > 2.13000
> > > > 2.73000
> > > > 0.86000
> > > > 2.48000
> > > > 2.63000
> > > > 1.90000
> > > > 4.12999
> > > > 3.44000
> > > > 3.90000
> > > > 3.05000
> > > > 1.54000
> > > > 3.46000
> > > > 3.73000
> > > > 3.23999
> > > > 4.63000
> > > > 3.90000
> > > > 3.50000
> > > > 5.23000
> > > > 7.03999
> > > > 5.56000
> > > > 4.86999
> > > > 3.05000
> > > > 3.60000
> > > > 4.31999
> > > > 5.82000
> > > > 4.31000
> > > > 6.03001
> > > > 7.00001
> > > > 6.00001
> > > > 7.51000
> > > > 7.73000
> > > > 6.59999
> > > > 7.56001
> > > > 8.93000
> > > > 9.64000
> > > > 7.62001
> > > > 6.35000
> > > > 6.20000
> > > > 6.91000
> > > > 5.61000
> > > > 6.07000
> > > > 7.22000
> > > > 7.68000
> > > > 7.26000
> > > > 6.85000
> > > > 4.69001
> > > > 1.00000
> > > > -0.61000
> > > > -1.13000
> > > > 0.23000
> > > > -0.10000
> > > > -0.05000
> > > > 1.30001
> > > > 0.29001
> > > > 0.34000
> > > > 1.43001
> > > > 0.68000
> > > > -0.26000
> > > > 0.99000
> > > > 0.19000
> > > > 0.13000
> > > > 0.90001
> > > > 1.68001
> > > > 1.70000
> > > > 1.30001
> > > > 0.77000
> > > > 1.00000
> > > > 0.80000
> > > > 0.76000
> > > > 1.55000
> > > > 2.43000
> > > > 2.47000
> > > > 2.44000
> > > > 4.26000
> > > > 3.74000
> > > > 2.22000
> > > > 3.43000
> > > > 2.48000
> > > > 1.05999
> > > > 0.24999
> > > > 1.67000
> > > > 1.87000
> > > > 1.07999
> > > > 1.04000
> > > > -1.64000
> > > > -0.51000
> > > > -0.21000
> > > > -1.99001
> > > > -5.00000
> > > > -6.58001
> > > > -8.41000
> > > > -7.32999
> > > > -6.87000
> > > > -5.99000
> > > > -7.73000
> > > > -6.25999
> > > > -7.04000
> > > > -6.79000
> > > > -4.93000
> > > > -2.84000
> > > > -1.97000
> > > > -0.12000
> > > > 0.02999
> > > > 0.88000
> > > > -0.69000
> > > > -1.65000
> > > > -0.68000
> > > > -0.78000
> > > > -1.01000
> > > > 0.20000
> > > > 0.34000
> > > > 0.09000
> > > > 1.36000
> > > > 0.88000
> > > > 0.32000
> > > > 1.45000
> > > > 1.05000
> > > > 1.33000
> > > > 0.07000
> > > > 1.80000
> > > > 1.62000
> > > > 0.66000
> > > > 1.27999
> > > > -1.43000
> > > > -1.88000
> > > > -0.04000
> > > > 0.93999
> > > > 0.35999
> > > > 1.86001
> > > > 2.19000
> > > > 2.13000
> > > > 3.80000
> > > > 4.50000
> > > > 5.92001
> > > > 5.86001
> > > > 5.09000
> > > > 5.85001
> > > > 6.35000
>
>
>
>
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