Professional-grade pair trading tools that democratize institutional strategies. Identify cointegrated pairs, track divergence, and execute market-neutral trades with confidence.
Pairs with |z-score| ≥ 2.0 showing strong mean reversion opportunities
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Calculate market-neutral positions with equal dollar values
Pair trading is a market-neutral strategy that profits from the relative performance of two correlated securities. Instead of betting on whether the market goes up or down, you bet on whether two related stocks will converge or diverge in price.
When historically correlated stocks (like BHP and Rio Tinto) temporarily move apart in price, we take opposite positions: buy (long) the underperforming stock and sell (short) the outperforming one. When they return to their normal relationship, we profit.
Measures how two stocks move together. Values range from -1 to +1. For pair trading, we want ρ > 0.80 (strong positive correlation). Example: If BHP and RIO have ρ = 0.94, they move in the same direction 94% of the time.
More important than correlation! Tests if the price spread between two stocks is stationary (mean-reverting). p-value < 0.05 means the pair is cointegrated and likely to revert to historical relationship. This is what makes the trade work.
Measures how far the current spread is from its mean, in standard deviations. Entry signals typically occur at |Z| > 2.0. Exit when spread returns to mean (Z ≈ 0). A Z-score of +2.3 means the spread is 2.3σ above average.
Stock A is undervalued relative to Stock B (z-score < -2.0). Action: Buy Stock A, Sell Stock B. Expected: The spread will widen as A outperforms or B underperforms.
Stock A is overvalued relative to Stock B (z-score > 2.0). Action: Sell Stock A, Buy Stock B. Expected: The spread will narrow as A underperforms or B outperforms.
Spread is within normal range (-2 < z-score < 2). Action: Wait for opportunity or close existing positions. Monitor for divergence.
Never risk more than 2-5% of your portfolio on a single pair. Use equal dollar amounts for both legs to maintain market neutrality.
Exit if z-score exceeds ±3.0 (spread continues widening). This prevents catastrophic losses if the relationship breaks down.
Trade multiple pairs across different sectors. Don't concentrate all positions in one industry (e.g., only banks).
Statistical relationships can break due to M&A, regulatory changes, or business model shifts. Stay informed about company news.