I'm setting up pairs trades by summing the distances squared (SSD). After determining the best pairs, I have to track the spread between the normalized prices. Am I noticing something that is bothering me or am I doing it wrong?
When I opened the transaction it was not cash neutral: For example, the long positions is for \$26,628.00 and the short one for \$29,886.00.
Watching the spread between normalized prices, can there be situations where my spread is moving towards the mean (further away from the average), resulting in losses? Will have to wait for the mean-reverting process to complete?
PS: So the spread will depend on the amount and size of stock purchased. Would that influence the behavior of the spread?