I am currently working on a project where I am testing a Pairs Trading Strategy based on Cointegration. In this strategy I am considering to trade a couple of hundred stock pairs every day over a time frame of 3 years. According to this strategy I am holding my trades open until either the take profit condition (revert to mean of spread) or stop loss condition (spread exceeding [mean + 3* standard deviation]) holds. This means that some trades might be open a couple of days, others might be open for weeks or even months.
My question is now: How can i calculate the returns of my overall strategy?
I know how to calculate the returns per trade but when aggregating returns over a certain time period or over all traded pairs I have problems.
Let's say I am trying to calculate returns over 1 year. I could take the average of all the trade returns or calculate sum(profits per trade of each pair)/sum(invested or committed capital per trade), both of these would only give me some average return values.
Most of my single trades are profitable but in the end I am trying to show how profitable my whole trading strategy is, so I would like to compare it to some benchmark, but right now I don't really know how to do that.
One idea I had, was to possibly estimate the average daily return of my trading strategy by:
- Estimating daily return per trade: (return of trade)/(number of days that trade was open)
- Taking the average of all the daily returns per trade
Then finally I would compare it to the average daily return of an index over the same time frame. Does this make any sense or what would be a more appropriate approach?