Ratio model
Model description
Ratio model is based on a fact that the prices ration of two suitably selected (correlated) stocks is stable in a longterm period. The prices ratio oscillates around the mean value (average) due to an effect of random fundaments. If the average is deflected over the specified limit, speculation is made on return to the mean value. The entry level is defined as a multiple of a standard deviation.
Procedure of Ratio model calculation
 Calculation of Close prices ratio
 Calculation of a moving average of prices ratio
 Calculation of standard deviation of prices ratio
 Calculation of actual relative deviation
Item 
Description 
CloseA 
EOD Close stock A (entry level) 
CloseB 
EOD Close stock B (entry level) 
Ratio = CloseA / CloseB 
Ratio of Close price stock A / Close price stock B 
RatioMA = MovingAverage(Period, Ratio) 
Moving average of Ratio values within Period of previous business days. 
StDev = StDev(Period, Ratio) 
Standard deviation of Ratio values within Period of previous business days. 
RelStDev = (Ratio  RatioMA) / StDev 
Relative standard deviation  comparison of current Ratio value with historical course within Period of previous business days. 
Entry to a position
Entry to a position is indicated, when relative standard deviation will exceed previously specified limit. Default entry level is 2.0, which corresponds to 95% quantile of values.
Exit a position
Position is finished (exit), when relative standard deviation will exceed previously specified limit. Initial value of the exit level is 0.0, ie. longterm average of the Ratio. It means that speculations are made on return of shortterm bias of the value back to the Ratio average.
If the prices ratio will not return to average value in the specified time, the position is closed by so called “Time Stop Loss”. Initial value for the time stop loss is 15 business days.
Graphic display of RATIO model
Item 
Description 
Price ratio (black) 
Ratio of Stock A and Stock B prices 
Moving average of the ratio (blue) 
Moving average (with entered Period) of Stock A and B prices ratio 
Entry levels (silver) 
Upper level (=entry level to Short position) = Moving average + Standard deviation * Entry level Lower level (=entry level to Long position) = Moving average  Standard deviation * Entry level

Pair equity (black) 
Resulting pair equity 
Trades (green and red) 
Profitable (green) and unprofitable (red) trades 