Trading Pairs: Capturing Profits and Hedging Risk with Statistical Arbitrage Strategies


  • Format: PDF
  • Pages: 288
  • Published Date: 2004


Trading Pairs: Capturing Profits and Hedging Risk with Statistical Arbitrage Strategies

Pairs trading is an effective trading style that has traditionally been utilized by institutional investors such as hedge funds and savvy individuals who trade for a living. But today, this style has been adopted by a broad range of traders–from the novice to the veteran. With the help of technology and some commonsense guidance, you too can begin using this technique to boost the profits of your portfolio.


This book is intended for the average investor who would like to gain a new perspective on the market. Traditionally, when we invest, we either buy or sell a stock, and then hope that it moves in our chosen direction. However, at times this strategy leaves us with a “naked” position that is simply at the mercy of the market.

Thus, pairs trading offers a unique alternative, and allows the individual investor a way to “hedge” positions. Think about it for a moment. If you have a long and a short position, then you are technically market neutral. And if the broader indices fall 200 points—in theory—your position should still be “flat.” The goal is to protect our portfolios from dra-matic market swings up or down, while finding stock relationship inequali-ties, in an effort to make money.

As a result, this book attempts to present the information of pairs in an easy-to-read format that allows the reader a new way of approaching invest-ing. In addition, the book is geared for “at home” investors who do not have expensive trading software. In fact, if you have access to the Internet and Microsoft Excel, you can do everything in this book. A little patience and drive will help you to reshape your current paradigm of the market.


  • The Nuts and Bolts
  • Why Fundamental Analysis? 5
  • Market Basics
  • Technical Analysis
  • Technical Analysis Indicators
  • Basic Pairs Terminology
  • Importing Data into Excel
  • Understanding Correlations—Steve Price
  • Understanding Stock Correlations in Relation to Indices
  • Basic Statistics
  • Excel and Statistics
  • Differential versus Ratio
  • Applying Statistics to Pairs
  • Taking a Step Back for a Moment
  • Moving Averages and Normalized Standard Deviation
  • Money Management
  • The Reality of Pairs
  • The Current Setup
  • Trading Diary
  • Correlating Stocks to Indices
  • Understanding Volatility
  • Understanding Volatility and Options
  • Using Technical and Fundamental Analysis
  • Assorted Advice to Assist Tradingwith Pairs