Review "Intraday Dynamic Pairs Trading using Correlation and Cointegration Approach"

[AlexCatarino]

In the "Intraday Dynamic Pairs Trading using Correlation and Cointegration Approach", there is conflicting information. In Introduction, we can read:

It's essential to understand how the cointegration residual together with the cointegration coefficient determines our trading direction. If ϵ is positive, in a given confidence interval, this is a signal that stock A is relatively overpriced and stock B is relatively underpriced, and we are going to long B and short A; If If ϵ is negative, we are going to long A and short B.

elsewhere, we can read

The final step of the strategy is to define trading rules. To open a pairs trading, the regression residual ϵt must cross over and down the positive σ standard deviation above the mean or cross down and over the negative σ standard deviation below the mean. If the residual is positive, we short stock B and long stock A; if the residual is negative, we short Stock A and long Stock B.

Despite the introduction seems to be right, the algorithm implements the second rule (with worse results).

Overall, we could also review the strategy logic in order to improve its readability. It's a good candidate for the Algorithm Framework.