Sample strategy #3 – Trading WTI/BRENT Spread

   Evans, Dunis and Laws show in their paper "Trading Futures Spread: An Application of Correlation" the possibility to use deviations from the fair spread value to bet on convergence back to fair value. They propose several ways to calculate fair spread value – via moving average, regression, neural network regression or other procedures. We present moving average calculation as an example trading strategy from the source paper.

   This simple strategy had an extraordinary indicative performance of nearly 40% with 22% volatility in their backtest. The estimated Sharpe ratio of 1.64 is therefore more than satisfactory.

   The source paper can be found on the following web page: http://www.palgrave-journals.com/jdhf/journal/v15/n4/full/jdhf200924a.html

   Our strategy overview with extracted trading rules and hypothetical performance chart with probability bands can be accessed here: http://www.quantpedia.com/Screener/Details/100

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