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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Important disclosures
Informational purposes only
Tradewink is published by Tradewink LLC, which is not a registered investment adviser, broker-dealer, commodity trading advisor, or financial planner. All data, signals, and analytics on this page are general, impersonal, and for informational purposes only. They do not constitute investment advice, financial advice, or a recommendation to buy or sell any security or other instrument.
Trading risk
Past performance does not guarantee future results. Trading involves substantial risk of loss, including the possibility of losing more than your initial investment. You are solely responsible for your own trading decisions.
Hypothetical & backtested results
These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.