What is the best number of pairs per sector? Some people say 1 is best; Is this true? I wonder where they got this notion from.
Hello Emma,
There is no one-size-fits-all answer and the number of pairs can depend on various factors.
Diversification: It's simple, right, having more pairs can provide better diversification, spreading the risk across multiple assets But adding too many pairs may dilute the effectiveness of the strategy.
Cointegration: The pairs selected should exhibit a reasonable degree of cointegration. Cointegration helps ensure that the spread between the pairs reverts to its mean over time.
Market Conditions:
In volatile markets, a strategy with fewer pairs may be easier to manage, while in calmer markets, more pairs might be suitable.
Transaction Costs: Obviously, each trade incurs transaction costs, and more the number of pairs, more transaction costs.
The characteristics of the assets themselves, such as liquidity, volatility, and trading volume, can influence the number of pairs that make sense for a given strategy.
Ultimately it is up to you to select how many asset pairs you want per sector.