Pair Trading Strategy

Pair Trading Strategy

Pair Trading Strategy Based on Spearman Correlation and Stationary Z-Score  is A single-pair indicator focusing on one primary symbol (chart symbol) and one secondary symbol for the MetaTrader 4 (MT4) platform, designed to support pairs trading by analyzing the correlation between two currency pairs. It employs Spearman’s rank correlation coefficient, Z-Score calculations, and stationarity testing to generate trading signals, displayed in a subwindow and on the main chart. The indicator integrates technical filters and risk management features, with a focus on user customization.

Key Features

1. Correlation Analysis:
• Calculates Spearman’s rank correlation coefficient to assess the relationship between a primary symbol (chart symbol) and a secondary symbol (default: EURUSD).
• Identifies negative (default threshold: -0.95) and positive (default threshold: 0.95) correlations to generate trading signals.
• Displays correlation values in a subwindow as a line plot with levels at ±0.9 and 0.
2. Z-Score and Stationarity:
• Computes Z-Score to measure the spread deviation between pairs, using a configurable lookback period (default: 100 bars) and threshold (default: 2.5).
• Supports stationarity testing via the Augmented Dickey-Fuller (ADF) test, with options for no transformation, first differencing, or logarithmic transformation.
• Allows users to require stationary spreads for signal generation (default: enabled), with configurable ADF test intervals (default: 60 seconds).
3. Technical Filters:
• Uses Moving Average (MA, default period: 20), Relative Strength Index (RSI, default period: 14), and Bollinger Bands (default period: 20, deviations: 2.0) to filter signals.
• Offers a Bollinger-only filter mode or no filter option, with optional Bollinger arrow display in the subwindow.
• Configurable RSI levels for buy (default: 30) and sell (default: 70) signals.
4. Signal Generation and Visualization:
• Generates buy/sell signals based on correlation, Z-Score, MA, RSI, and Bollinger conditions, displayed as arrows in the subwindow, main chart, or both (configurable).
• Supports positive and negative correlation signals, with distinct logic for each (e.g., buy Symbol1/sell Symbol2 for negative correlation).
• Arrows on the main chart have adjustable sizes (1–5, default: 1).
5. Overlay Chart:
• Optionally displays the secondary symbol’s price movement on the main chart, with mirroring for negative correlations (default: enabled).
• Normalizes price ranges over a configurable bar count (default: 100 bars) for visual comparison.
6. Risk Management:
• Includes Stop Loss (based on ATR, default period: 14, multiplier: 1.5), Trailing Stop (default start: 75% of target profit), and Take Profit (default reward:risk ratio: 2.0).
• Monitors breakeven (default: 33%) and close (default: 67%) correlation levels, calculated using cointegration parameters.
• Displays risk management data (stop loss, take profit, trailing stop, breakeven, close levels) on the main chart.
7. Alerts and Notifications:
• Provides alerts for new signals (current bar, closed bar, or both) and risk management updates (stop loss, take profit, etc.).
• Supports pop-up alerts and push notifications, with configurable settings to enable/disable.
• Prevents repeated alerts using timestamp tracking.
8. Additional Features:
• Calculates Average Daily Range (ADR, default period: 14 days) as a percentage for market context, displayed on the chart.
• Implements data retrieval with retry attempts (default: 3) and timeouts (default: 500ms for data, 1000ms for ADF) to handle connectivity issues.
• Displays cointegration parameters (d, k, m) and stationarity status on the chart.
9. Customization:
• Offers extensive input parameters for adjusting lookback periods, thresholds, filter settings, arrow locations, and display options (e.g., font size, arrow size).
• Allows enabling/disabling features like RSI, Bollinger Bands, Z-Score, ADF test, overlay chart, and risk management tools.

Usage

• Initialization: Sets the primary symbol to the chart’s symbol and validates the secondary symbol’s availability. Initializes buffers, arrays, and ADF test if enabled.
• Operation: Calculates correlations, Z-Scores, and technical indicators per bar, updating signals, arrows, and chart overlays. Refreshes on-chart information every 60 seconds.
• Visualization: Plots Spearman correlation in a subwindow, places signal arrows on the main chart or subwindow, and displays risk and correlation data on the chart.
• Deinitialization: Removes all indicator objects (arrows, labels, overlay lines) upon removal.

Notes

• Requires sufficient historical data for calculations (minimum bars based on lookback and filter periods).
• Ensures robust data handling with retry mechanisms and timeout controls.
• The overlay chart feature is optional and can be disabled for performance.
• When using Pair Trading Strategy Based on Spearman , make sure to limit the bars in the Max bars in chart option to below 2000, for example 500.