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The following link has a good summary of a typical pair trading strategy: https://www.quantstart.com/articles/Backtesting-An-Intraday-Mean-Reversion-Pairs-Strategy-Between-SPY-And-IWM It actually has full python code as well. It doesn't include a cointegration check though. Edit: if X and Y are cointegrated: calculate Beta between X and Y ...


1

Your reasoning is correct. To answer your last question: the current prices alone don't decide how many shares to sell and buy in each of the stocks. That is decided by the hedge ratio. In fact, the whole point of the hedge ratio is to assume that it is the ratio that the stocks will revert back to over time. So if we denote the spread at time $t$ by $s_t$ ...



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