A recent study looked at pairs trading the index ETFs (DIA, IWM, QQQ, SPY). Tom and Tony look at new research that takes this concept a step further.
The team decided to isolate trade, looking for larger divergence in the index products.
- 2004 - 2017
- DIA, IWM, QQQ, SPY
- Observed 1 Month of Movement in each ETF (Daily)
- Simulated buying the weakest, selling the strongest
- Compared the position for:
- 1% Return on Capital
- 2% Return on Capital
- If the ROC target was not met, the trade was held for 3 months.
- All Occurrences
- Occurrences where the divergence was over 5%
The results are extremely compelling and historically, it appears that waiting for wider divergence enhanced pairs trades.
Tune in for all the metrics and the full discussion!