When we do Johanson test, if I have 3 stocks X1,X2,X3 and it is stationary I will go ahead and enter trade basis my parameters. Combination X2,X1 and X3 will also throw similar values but for the Eighen value which is varying for these 2 triplet. How can I enter trade for the same combination of stocks again? Is it right? Also, I observe a stock which is recommended for Long in 1st triplet is being recommended for sell in the second combination of triplet.
please clarify at the earliest.
thanks,
Arun
The eigen values show how strong the timeseries is mean-reverting. Yes, there are multiple combinations possible but you should trade only one combination whose eigen value is highest.
Some of the combinations can show contradictory position such as long in one combination and short in other combination. But remember we are trading the spread, that is X1, X2 and X3 together. The idea is that the spread which will be formed using X1, X2 and X3 will be stationary or mean-reverting.