Does pair trading work all the time?

00:55 Mins Read

When does pair trading work, and when does it not? Find out more about it in this video.


The short answer is no, it doesn't. For starters, pair trading will not work if the correlation is random. Two entirely unrelated stocks could appear to be mathematically correlated. But if the correlation does not make practical and intuitive sense, it could be random. Pair trading may also not work if your sample size is too small. And lastly, past correlation does not guarantee of future corrleation. There is no guarantee that the correlation will revert to the mean once the trade is executed. To execute a pair trade well, you'll need to know how to identify the right opportunity to initiate it. Learn more about this in the upcoming chapter.

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