Financial Analysis - Build a ChatGPT Pairs Trading Bot - Pairs Trading Intuition

The video tutorial explores the use of ChatGPT to generate a pairs trading algorithm in Python. It highlights the importance of understanding and analyzing code, identifying mistakes, and correcting them. The tutorial covers key concepts such as Z-scores, spread, Bollinger Bands, and trading signals. It also discusses the calculation of portfolio returns and common errors in code. The instructor emphasizes the need for critical thinking and understanding the limitations of AI-generated code.

What is the primary goal of the course as mentioned in the introduction?

• To create complex algorithms from scratch

• To memorize Python syntax

• To understand the thought process behind code analysis

• To learn how to run code without errors

Why is it problematic to use future data for calculating Z-scores?

• It is not supported by Python libraries

• It leads to inaccurate trading signals

• It makes the code run slower

• It requires more computational power

What is the purpose of computing the spread between two assets?

• To determine the average price of the assets

• To identify the difference in their Z-scores

• To calculate the total return of the portfolio

• To find the correlation between the assets

What are Bollinger Bands used for in trading?

• To calculate the average return of a portfolio

• To provide trading signals based on price deviations

• To smooth out time series data

• To predict future stock prices

How are long and short signals determined in the algorithm?

• By using machine learning predictions

• By analyzing the trading volume of the assets

• By checking if the spread is outside the Bollinger Bands

• By comparing asset prices to their historical averages

What is the role of asset positions in the trading strategy?

• To determine the initial investment amount

• To decide the proportion of assets to hold

• To execute trades based on long and short signals

• To calculate the risk associated with each asset

Why is the calculation of portfolio returns in the code incorrect?

• It uses Z-scores instead of actual returns

• It does not account for transaction costs

• It uses outdated financial models

• It assumes constant asset prices

What is a common mistake when using cumulative sum for returns?

• It overestimates the total return

• It only works for log returns

• It requires additional data preprocessing

• It is not supported by most programming languages

What is a potential risk of relying on AI-generated code?

• It requires advanced hardware to execute

• It is always outdated

• It can contain semantic errors despite running without syntax errors

• It may not run on all operating systems

What should be considered when evaluating AI-generated trading algorithms?

• The speed of execution

• The accuracy of financial concepts used

• The number of lines of code

• The popularity of the algorithm