Pairs Trading Strategy — Market Neutral Approach
r/algotradingstocksDaily (automated, multi-day holds)by reddit_community
Pairs trading on correlated stocks (KO/PEP, XOM/CVX). Enter at 2+ SD deviation, exit at mean reversion. Market neutral. Backtest: 1.8 Sharpe, 8% max DD.
ENTRY RULES
Identify pairs with correlation > 0.85 over 60 days | Calculate spread = ln(price_A/price_B) | Enter when spread > 2 standard deviations from 60-day mean | Long the underperformer, short the outperformer | Equal dollar amounts on each leg
EXIT RULES
Exit when spread returns to within 0.5 SD of mean | Hard stop at 3.5 SD — close both legs | Maximum hold: 20 trading days | If correlation drops below 0.60, close immediately | Rebalance legs weekly to maintain dollar neutrality
INDICATORS
Spread RatioZ-ScoreCorrelationStandard Deviation
ORIGINAL POST
389
r/algotradingposted by reddit_community
Pairs Trading Strategy — Market Neutral Approach
Pairs trading: find two correlated stocks (e.g., KO and PEP, XOM and CVX), calculate the spread ratio. When the spread deviates 2+ standard deviations from the mean, go long the underperformer and short the outperformer. Exit when spread reverts to mean. Market neutral so does not matter if market goes up or down. Backtested Sharpe of 1.8 with max DD of 8%.
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