Im am in the middle of developing my first pairs trading strategy and could use some help in thinking about my stop loss.I am selecting pairs based on Engle-Granger methodology and entering trades based on the residuals (zscore readings of >2.2 or < -2.2). I am using the beta of the regression to weight my pairs. So far, my methodology for a stop loss is to cut the position if the total loss on the pair is at 5% OR if the residuals close above +/-2.2SD (my entry) for 3 days straight and the direction of the move has been against me for 3 days straight. Can anyone point me into the right direction in regards to optimizing my stop loss?Cheers

QuoteCan anyone point me into the right direction in regards to optimizing my stop loss?Slippage, slippage and once again slippage.

Could you clarify what you mean by slippage? I'm quite interested in his question

a problem with statistical trading is that the entry is assumed to be "right" which naturally gives rise to the difficulty of devising a stop-loss point