Kalman-Pitchfork Structural Arbitrage
Family: mean_reversion · Regime: ranging · Complexity: high · Asset classes: Equities, Crypto (Pairs), Forex (Crosses) · Timeframes: 1H, 4H, Daily
Thesis
Mean-reversion is most effective when statistical extremes (Z-Score) are corroborated by a return to established geometric structures (Pitchfork Median Line). By using a Kalman Filter to dynamically adjust for the changing relationship between two assets, we can capture temporary mispricings. The strategy assumes that even if a pair's correlation drifts, the price will respect the local volatility boundaries (BBands Stop) and momentum exhaustion points (ADX) rather than trending to infinity.
Components
- Price Line and Visible Range High-Low (regime) — Provides a visual filter to ensure mean reversion trades are not attempted during fresh breakouts of the current visible timeframe's boundaries.
- Auto Pitchfork (direction) — Defines the structural slope of the market; entries are only valid when the mean-reversion signal aligns with the return to the Pitchfork's Median Line.
- AI Pair Trading System v1.0 (entry) — Uses Kalman Filter-based Z-scores to identify statistical extremes between two correlated assets, providing the primary entry trigger.
- ADX / Connectable [Azullian] (exit) — Used to detect momentum exhaustion (ADX decline) to exit the trade before a volatility expansion in the opposite direction.
- TopTrend (BBands Stop) (risk) — Provides a volatility-adjusted trailing stop based on Bollinger Band outer limits to protect against trend reversals.
Known failure conditions
- The Kalman Filter 'Beta' (relationship between pair assets) remains unstable for more than 50 bars.
- Price creates a series of higher highs while the AI Pair Z-score remains stuck at extreme overvaluation (divergence failure).
- Pitchfork pivots are redrawing frequently (more than once per 5 bars) suggesting lack of structural clarity.
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