Attached are two charts of Axisbank-Yesbank Pair from Pairtrade Finder software that I use.
In the first image, you can see I have only those pairs populated that has above 90% Co-integration and above 70% Correlation. And today this pair crossed the 2.7 Standard Deviation from mean.
Arbitrage or Pairs trading believes on historical data and assumes that at some point of time, the pair will revert back to their historical mean, i.e. 0 STDev.
At the same time, look into the following two pictures of axisbank and yesbank. They are 5 min chart.
If you look at the first Axis chart, you will see, Axis retraced 50% Fib level when I took the trade and Yes bank is sitting at top; expecting at least 23.6% Fib level correction here as the Pair is highly correlated and cointegrated.
Also, in the 2nd picture, you can see the correlation graph is rising. It is very important that you take trade with a rising correlation.
The above pair can diverge much further from 2.7STDev, in that case, I may add another position at around -20,000 M2M
As of writing this, it has a miniscule profit of around 2000/-. When it will reach STDev 1, one can expect around 40-50K Profit.
I am also watching all other pairs shown in the first pic.
