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Example of pair trade graphical representation
A pairs trade or pair trading is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy.[1] Pair trading was pioneered by Gerry Bamberger and later led by Nunzio Tartaglia's quantitative group at Morgan Stanley in the 1980s.[2]
The strategy monitors performance of two historically correlated securities. When the correlation between the two securities temporarily weakens, i.e. one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the underperforming one, betting that the "spread" between the two would eventually converge.[3] The divergence within a pair can be caused by temporary supply/demand changes, large buy/sell orders for one security, reaction for important news about one of the companies, and so on.
Pairs trading strategy demands good position sizing, market timing, and decision making skill. Although the strategy does not have much downside risk, there is a scarcity of opportunities, and, for profiting, the trader must be one of the first to capitalize on the opportunity.
A notable pairs trader was hedge fund Long-Term Capital Management;[4] see Dual-listed companies.
^Kanamura, Takashi; Rachev, Svetlozar; Fabozzi, FranK (5 July 2008). "The Application of Pairs Trading to Energy Futures Markets" (PDF). Karlsruhe Institute of Technology. Archived from the original (PDF) on 2013-02-05. Retrieved 20 January 2015.
^Bookstaber, Richard. A Demon Of Our Own Design, p. 186. Wiley, 2006.
^"Lecture 23: Pairs Trading" (PDF).
^Lowenstein, Roger (2000). When genius failed : the rise and fall of Long-Term Capital Management (1 ed.). New York: Random House. ISBN 978-0-375-50317-7.
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manager, and these insights are not replicated across funds. Delta neutral Pairstrade Equity Market Neutral Related Scholarly Compositions Equity Market Neutral...
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volatility. It's essentially about trading the index's correlation, calculated through specific financial models. Pairstrade Rainbow option Ferrari, Pierpaolo;...
clock, with the exception of weekends. Since currencies are always traded in pairs, the foreign exchange market does not set a currency's absolute value...
scoring records and led his team to four Stanley Cup championships. Gretzky's trade to the Los Angeles Kings on August 9, 1988, had an immediate impact on that...
of leverage, potentially leading to bankruptcy as in the LTCM case. Pairstrade "Cash and Carry Arbitrage" (PDF). Uni.edu. Retrieved 29 July 2016. "Cash...
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exchange market, spot is normally two banking days forward for the currency pairtraded. Other settlement dates are also possible. Standard settlement dates...
rights to Dark Horse Comics, Biohazards was republished as a trade paperback entitled Dirty Pair: Biohazards – 10th Anniversary Special Edition in September...
multiple currency pairs. No intervention is required by the client as all the account activity is controlled by the platform. Clients may trade one or more...
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