Pairs Trading Strategy
Pairs trading is a market-neutral strategy that exploits temporary divergences between two historically correlated stocks. By going long the underperformer and short the outperformer, you profit when the spread converges — regardless of overall market direction.
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How It Works
- 1
Identify stock pairs with high historical correlation (r > 0.8) within the same sector
- 2
Calculate the z-score of the price ratio or spread between the two stocks
- 3
Enter when the z-score exceeds 2 standard deviations (long the laggard, short the leader)
- 4
Exit when the z-score returns to 0 (spread has normalized)
- 5
Set a stop if the z-score exceeds 3 standard deviations (divergence is structural)
Best For
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Frequently Asked Questions
What is pairs trading?
Pairs trading involves simultaneously buying one stock and selling another correlated stock when their price relationship diverges from the historical norm. Profit comes from the convergence of the spread, not from market direction.
How does Tradewink find pairs?
Tradewink uses correlation analysis, cointegration testing, and machine learning to identify tradeable pairs. The AI monitors spread z-scores in real-time and alerts when entry conditions are met.
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