| name | pair-trading |
| description | Pair trading strategy. Trades mean reversion using the spread/ratio Z-score of two correlated instruments. Requires at least two instruments. |
| category | strategy |
Pair Trading Strategy
Purpose
Select two highly correlated instruments (such as stocks from the same industry or BTC/ETH), monitor how far their price ratio (or spread) deviates from the mean, and trade against extreme deviations while waiting for mean reversion.
Signal Logic
- Compute the price ratio:
ratio = close_A / close_B
- Rolling mean and standard deviation:
mean = ratio.rolling(lookback).mean(), std = ratio.rolling(lookback).std()
- Z-score:
z = (ratio - mean) / std
- Signal generation:
- Z < -entry_z → long A, short B (ratio is too low, expected to revert)
- Z > +entry_z → short A, long B (ratio is too high, expected to revert)
- |Z| < exit_z → close the position (reverted back near the mean)
Implementation Notes
- Pair trading requires exactly two instruments (
codes array length = 2)
- The first instrument is A (
leg1), and the second is B (leg2)
- Signals for A and B are opposite: when A is long, B is short, and vice versa
- Equal-weight allocation only: A and B each take 50% of capital, with no precise hedge-ratio calculation
Parameters
| Parameter | Default | Description |
|---|
| lookback | 60 | Lookback window for mean and standard deviation |
| entry_z | 2.0 | Entry Z-score threshold |
| exit_z | 0.5 | Exit Z-score threshold |
Example config.json
{
"source": "tushare",
"codes": ["601318.SH", "601628.SH"],
"start_date": "2023-01-01",
"end_date": "2024-12-31",
"initial_cash": 1000000,
"commission": 0.001,
"extra_fields": null
}
Cryptocurrency version:
{
"source": "okx",
"codes": ["BTC-USDT", "ETH-USDT"],
"start_date": "2024-01-01",
"end_date": "2024-12-31",
"initial_cash": 1000000,
"commission": 0.001,
"extra_fields": null
}
Common Pitfalls
codes must contain exactly 2 instruments, no more and no less- The date indexes of the two instruments must be aligned (use an inner join), otherwise the ratio calculation will be wrong
- Before the lookback window is filled, Z-scores are
NaN, so fill signals with 0
- Do not generate same-direction signals for both A and B; pair trading is fundamentally a long-short hedge
Dependencies
pip install pandas numpy
Signal Convention
- Instrument A:
0.5 = long, -0.5 = short, 0 = flat
- Instrument B: direction is opposite to A
