Correlation and Cointegration: Differences Between Watchlist and Backtester Readings

Correlation and Cointegration: Differences Between Watchlist and Backtester Readings

The backtester is looking at Avg Correlation and Avg Cointegration.  And as of the launch of Ultimate Alpha 3.0, the backtester also now includes Spot Cointegration.

For Avg Correlation, it takes the lookback window chosen in System Preferences/Chart Options/Correlation Lookback and calculates that figure for each trading day in the backtest period and then averages them. It uses percentage change in daily prices.

Avg Cointegration takes the result of the CADF test, looking back 730 calendar days from each Close data point for each day in the last 730 days and presents the average result. 

Spot Cointegration is the Cointegration result from running the CADF test from yesterday's close price and looking back 730 calendar days only.

The Watchlist presents Spot Correlation and Spot Cointegration.  It uses the Correlation Lookback on a daily basis on the pair and uses the lookback window chosen in System Preferences/Chart Options/Correlation Lookback. This calculation allows you to see if the pair remains correlated on a daily basis and can help you decide regarding Entry or Exit.  The Cointegration is the Spot Cointegration taking the reading from the last 730 days of data only (same as Spot Cointegration in the backtester).  So if it is not Cointegrated it means the historic relationship that was identified in the backtester on "Average" is not present over the last 730 days.  Again, helps to decide on Entries and Exits.