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Differential DV2 Calculation

July 29, 2009

DV2 differential calculation:

C, L, H= (close, low, high)
P= the percentrank function in excel default lookback of 250 days
Avg=the average
T=today (at the end of the day)
Y=yesterday

DV2 (not the unbounded version)=

P(average(C/(H+L) for T,  C/(H+L) for Y))

calculate this for ETF A and ETF B

the differential (D) is:

D= P(DV2 for ETF A – DV2 for ETF B)

if P is below .5 then Long ETF A, Short ETF B and vice versa. My advice is to wait for bigger discrepancies–ie .3/.7 for long/short

3 Comments leave one →
  1. ruth permalink
    August 3, 2009 5:21 pm

    Hi! I am new to your DV2 indicator.

    Just to clarify the details:

    when D crosses 0.7 then short A, long B;

    Is that correct? (I changed P in your text to D.)

    Also, I added the word “crosses” to specify that one opens the pairs trade when D first crosses the extreme value.

    Or should the pairs trade be opened when D crosses back up above 0.3 after being below, or D crosses back below 0.7 after being above it? (Wish I could draw it–so much easier than words.)

    Thanks!
    ruth

    • cssanalytics permalink*
      August 3, 2009 6:29 pm

      hi ruth, supposing you had two stocks A in the left column, and B in the right column, the baseline strategy assumes shorting A and buying B when the DV2 differential is above .5, when it is below .5 you would cover and reverse your position to buying A and shorting B. To be conservative, as i am—i typically enter at .7 to short A and buy B, and cover below .5. I wait for the DV2 to hit .3 to buy A and short B, again covering at .5. Hope that helps.

      dv

    • cssanalytics permalink*
      August 3, 2009 6:45 pm

      hi, final note, i don’t use any fancy crosses in the calculation of strategy returns– perhaps this would work better, but in the examples and in my suggestions i am referring to the first time the differential DV2 moves above or below a given level to trigger a trade. So if the DV2 was at .55 and it moved above .7 the next day, i would enter my short A and buy of B on that day close to the closing bell. The reverse would be true for buys. Exits also occur the first time the differential dv2 crosses .5 from either above or below. Hope that helps. dv

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