Pair Trading Strategy: A Comprehensive Guide

Quick overview: Pair Trading at a glance

Introduction

Pair Trading is a powerful, market-neutral trading strategy that aims to profit from the relative price movement between two correlated assets. Originally developed in the 1980s by Morgan Stanley’s Nunzio Tartaglia, this strategy has evolved from a hedge fund staple to a widely accessible technique used by retail traders around the world.

In this guide, we’ll walk you through how pair trading works, how to identify and manage trade opportunities, and how to apply it using platforms like easyMarkets and TradingView. Whether you’re into stocks, forex or crypto, this strategy has something for you.

What is Pair Trading?

At its core, pair trading (also called statistical arbitrage) involves opening a long (buy) position on one asset and a short (sell) position on another closely correlated asset. The goal is to profit from the price difference between the two, regardless of the market's overall direction.

This strategy is considered market-neutral because it doesn’t depend on the market moving up or down, but on the relationship between the two assets returning to balance.

It’s based on the idea of mean reversion – the assumption that prices eventually revert to their average over time. It works especially well in sideways or range-bound markets, where opportunities for dislocation and convergence are more common.

How the Pair Trading Strategy works

Step 1: Choose a pair of correlated assets

Start by identifying two assets with a strong historical relationship. These could be stocks from the same industry, currency pairs, or indices with similar movement patterns.

Examples: Ford and General Motors, EUR/USD and GBP/USD, Bitcoin and Ethereum.

Step 2: Conduct research and analysis

Go beyond the price chart. Understand the business fundamentals, seasonal trends, and news events that might affect each asset. Check how their correlation behaves over different time frames. Is it stable or just temporary?

You’ll want to verify that the pair’s relationship has remained consistent over time and isn’t skewed by a one-off event.

Step 3: Calculate correlation and spread

Use tools like TradingView or statistical software to calculate the correlation coefficient and monitor the price spread between the two assets. This helps you determine ideal entry and exit points.

Step 4: Monitor with Alerts

Set up a watchlist and create alerts on the easyMarkets trading platform or your preferred interface (MT4, MT5, TradingView). Alerts help you act quickly when correlations change or spreads widen.

Step 5: Define entry and exit rules

Set clear rules for when to enter and exit trades, including correlation thresholds and target spread ratios. Define stop-loss and take-profit levels to manage your risk.

Step 6: Execute the trade

When your conditions are met, open a long CFD position on the undervalued asset and a short CFD position on the overvalued one. Your profit doesn’t depend on whether the market rises or falls – it depends on the price relationship converging.

Step 7: Review and reflect

After the trade is closed, assess your performance. Did the spread behave as expected? Were the signals clear? Review your entry and exit strategy and refine your rules for future setups.

Setting up Pair Trading on TradingView

Pair Trading with easyMarkets using TradingView is a straightforward process. Here’s how to set it up:

Step 1: Create an account

Sign up for a TradingView account and select a subscription that fits your needs.

Step 2: Select a pair

Search for two CFDs that have shown historical correlation. Open each in a new chart tab.

After setting up your account, the next move is to pick your set of securities. Find two financial instruments that closely track each other – this might include stocks, indices, forex, commodities, or others – guided by your research.  Head to the main dashboard and enter the name of your first CFD into the search bar, then press enter. A chart for the selected CFD will appear in a new tab. 

Repeat this process to create a second CFD chart, allowing you to compare it with the first.

Step 3: Set up your charts

Use TradingView’s multi-chart layout feature to view both CFDs side by side. This makes it easier to monitor divergence and convergence.

To split your chart, click the grid-like chart layout icon at the top right and select your desired layout from the dropdown menu.

Step 4: Identify divergence and convergence

Watch for moments when price movements diverge from their historical ratio. When they begin to converge again, it may be time to exit the position.

Step 5: Set Alerts

Use TradingView's alert system to be notified of price changes or indicator triggers. Just click on the 'Alert' icon situated on the upper left side of the main trading interface. This will bring up a window where you can specify trigger conditions for your alerts, such as changes in the CFD's price or a moving average crossover. Then, you can choose whether you would like to be notified through email or a push notification on your mobile app.

Tools for Pair Traders

Is Pair Trading right for you?

You might benefit from pair trading if you:

However, if you’re new to short selling or prone to emotional trades, you might start with demo accounts before trading real capital.

Conclusion

Pair trading is a smart, research-driven strategy that uses logic and data, not guesswork, to make trading decisions. While it requires patience, discipline, and proper risk controls, it can deliver consistent opportunities across any market environment.

Explore pair trading with a demo account, refine your process, and when you’re ready, go live with a strategy that’s as flexible as the markets themselves.