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 (
codesarray 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
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:
json{ "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
codesmust 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
bashpip install pandas numpy
Signal Convention
- Instrument A:
0.5= long,-0.5= short,0= flat - Instrument B: direction is opposite to A

