Pairs 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.

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. 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. Read more at Wikipedia.

Thanks to market neutrality, this trading strategy can be very safe (if diversified) and immune to global market crisis, even when the entire market or sector falls down. If you trade enough pairs at the same time, your pair trading portfolio could perform well also in difficult market situations.

Let's take a look on example: we take these two stocks - GlaxoSmithKline plc and Novartis AG. These are stocks of companies in the healthcare sector and their prices are quite correlated. Now, let's make a backtest of difficult period of 2008-2009 where the stock market dropped a lot because of the crisis:

Backtest GSK vs NVS in period 2008-2009

As you can see, prices of both stocks dropped considerably in this period (i.e. NVS price dropped by terrifying 38%). But if you traded these stocks as a pair, you would gain amazing 125% of initial capital (considering 50% margin) with drawdown being just 9%, which is an excellent result for this difficult period!

This website represents a complete set of tools you require to setup your own pair trading portfolio, all in one. You may use it to:

• backtest of pair trading strategies - verify pair trading ideas, inspect behavior and robustness of pairs
• test pairs for cointegration online, analyze cointegration residuals
• search our database of up to 10,000,000 pre-analyzed US market pairs using complex filters (including cointegration and profit measures)^[1]
• create and maintain lists of interesting pairs, rate them & tag them
• create, maintain and backtest portfolios of pair strategies^[2]
• execute your portfolios automatically, live, in real-time using our free application PTL Trader

^[1] available to Premium Members only