I have been doing research/back testing of Correlated/Co-Integrated pairs of stocks. I've come up with various tests for determining pairs and generating trading signals. My knowledge level of some of the practical aspects of the strategy are lacking; specifically, how would one figure out profit percentages per trade in relation to how brokers manage your haircut/margin. Let me give a quick example to demenonstrate what I don't fully understand.I buy Stock A for $100 and I sell stock B for $100 and I hold this trade for 1 year exactly selling Stock A for $110 and buying back Stock B for $90. What is typical/rule-of-thumb/practical for how much money I needed in my account to perform this trade? I'm assuming I don't need a full $200 to execute the trade and that I don't need to maintain a cash balance equivelant to what my daily total current loss is. What kind of leverages are standard for individuals and what about a larger institution such as a Hedge Fund. Let me assume that the answer to the above question is that to perform this trade I need $20 in my account and maintain this 10% of total stock value throughout the trade. Let me then assume I have essentially borrowed $180 for the life of this trade to own/short the two legs (1 year). What is typical of an interest rate to pay my broker/clearing firm for this privledge if I am an individual and similary if I am a Hedge Fund.

I believe IB gives individuals 4x leverage on their margin accounts over 100K. They use a portfolio margining calculation so this will change based on the size of your account and what you portfolio looks like. GS gives about 12x leverage for a dollar neutral portfolio. This will change based on what the portfolio looks like.It is never a good idea to use 100% of your leverage. I think 50% on average is probably normal depending on the size of your portfolio.Since you are trading a dollar neutral strategy you are using the money from selling B to purchase A so you are not borrowing anything from your clearer. This assumes you have extra money in your account to cover any fluxuations from neutrality.Rates vary significantly. Also remember you have execution fees, margin financing fees, stock borrowing fees, etc...$.02

Thanks Marine,So part of my question I suppose was what are typical margin financing fees (any ballpark) for an individual and also what about a large fund? My question pertaining to the selling short portion of the trade is when I sell short I am given the proceeds from my sale, I use these proceeds to purchase the opposing stock. Do I not have to pay a finacing fee to my broker for the proceeds received from my sale? This is essentially borrowed money by me, no? I understand I'd have to maintain a minimum amount value when shorting a stock to prove I can cover the mark to market potential loss, but is there any additional overhead of shorting the stock versus simply going long a stock?I'm not totally sure what I'm looking for in this next part below, but maybe some more direction on analyzing the back-testing of my strategy. I've analzyed the previous 20 years worth of trading opportunities and found 6,700 trades with a win percentage of 74%. Assuming no leverage whatsoever and that I maintain the exact cash in my account for the price I sell short my one stock and matain the exact cash for the purchase of the stock, I see Mean returns of 6% and median returns of 10.02% with an average trade duration of ~100 days. I'm trying to figure out some standards for more extensively analyzing these results. My next step is to determine max draw downs, sharpe ratio, beta, and alpha. Typically, what else is evalutead? My main concern in back testing thoroughly, historically, is the survivors basis and how to find data for ALL stocks. I'm finding it extremely difficult to find data sets that include re-organized and bankrupted companies, whic may account for a large percentag of losing trades that I'm missing.

The S&P index has had similar/better returns year over year has it not? 6-10% per month maybe but not yearly.How much capital are you talking about to impliment?

Well not quite, it is better than the S&P index over that time frame. The 6% return is over an average of 100 days (100 total days not 100 trading days). So 1.06^(365/100) is roughly a 24% annual return. This also assumes that I maintain 100% of the capital in my account equal to the proceeds of selling short the stocks, which is a very conservative strategy I believe, but something I'm trying to gain a better understanding of here. The strategy roughly requires a minimum $100k-$200k initial capital, and obviously the larger this amount the more likely it is to get slippage in order fill prices. One other obvious assumption I'm making is that my filtered stocks are easily borrowed from a broker. I set minimum market cap and volume restrictions to assume I could trade a stock, but nobody knows of any historical data to help simulate this any better way do they?