Pairs Trade
A market-neutral strategy that simultaneously buys one stock and shorts a correlated stock, profiting from the convergence of their spread.
Explained Simply
Pairs trading exploits temporary divergences between two historically correlated or cointegrated stocks. When the spread between them widens beyond a statistical threshold (e.g., 2 standard deviations), you buy the underperformer and short the outperformer, betting they'll converge. The beauty is market neutrality — you profit regardless of market direction because your long and short cancel out market risk. Classic pairs: Coca-Cola/Pepsi, Visa/Mastercard, or ETFs tracking similar indices.
How Tradewink Uses Pairs Trade
Tradewink's PairsTrader module maintains a universe of cointegrated pairs, tested using the Engle-Granger method. When a pair's z-score exceeds +/-2.0, the AI generates a pairs trade signal with specific entry, exit (z-score reversion to 0), and stop-loss (z-score exceeding +/-3.0) levels. The module recalculates cointegration weekly to catch relationship breakdowns.
Related Terms
See Pairs Trade in action
Tradewink uses pairs trade as part of its AI trading signal pipeline. Start getting signals that use this concept to find real opportunities.