Welcome, back! In this post, I'd like to further expand on an earlier discussion on correlations, this time analyzing how it can be used in pairs trading!
Using some basic Google Finance functions, I created a spreadsheet to get prices for a few of my favorite ETFs in real-time (well, 20 min delayed). One of the core functions I used from Google Finance was "=GOOGLEFINANCE("SPY","CLOSE",TODAY()-500,TODAY())". This allows me to get the historical closing prices for SPY for past 500 sessions.
Using the historical prices downloaded in Google sheets, I was able to use the "CORREL" function to find the correlations between two data sets i.e., historical prices of two different ETFs.
Since I was using multiple ETFs, I decided to construct a table to in order to obtain a birds-eye view over the entire collection of the ETFs. Here was the end result:
What does it mean?
A closer look at the table highlights an opportunity in SPY (S&P 500) versus XLK (Tech sector). The table below shows the relevant stats:
Here, I've highlighted only the portions relevant to the trade so we can focus on task at hand. Let's look them:
Thank you for reading! I hope this has been helpful in understanding pair trading through using correlations! If you're interested, you can find my Google Sheets here!
Eighteen-year old trader, future connoisseur of options.
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