Stocks & Commodities V. 25:2 (43): Q&A by Don Bright
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
KEEPING IT CONSISTENT
When you are performing analysis on a couple of stocks for a pair trade or some sort of relative performance, or for that matter comparing advancing issues and declining issues of a limited basket (say
the sp100 basket), is it better to do a ratio (dividing the two) or a difference (subtract the two)? I have seen examples from different sources including
pairtrade.com when dividing and subtracting were used. When I look at the differences between the two ways of looking at the data, I notice they basically mirror each other most of the time and are almost identical, but there are times when the ratio of the two shows a spike and starts to move quicker in the opposite direction than the difference of the two. What is your take on using these two different calculations? Is one
better than the other? Why on some occasions does the ratio exhibit quicker and better trend movements than the other calculation?
In a basic spread chart, when you subtract the two different stocks or divide the two stocks so that you create a spread chart that shows more of a range-bound or oscillating quality to find those mean reverting signals, why do some people use a subtraction of the two stocks while others use a ratio or division of the two to create a new spread chart? óraker