Pairs: prices that drift apart and come back

Pairs looks for two prices that move together closely enough that the gap between them keeps returning to its average: cointegrated pairs. For each pair it gives the hedge ratio, the half-life of a stretch and how far the spread is from its mean right now, and it tests trading that spread. It is a Pro Lab tool, part of the Pro and Elite plans.

Scanning a list

1. On a computer, press Pro Lab on the right-hand toolbar; on a phone, open the analysis centre from the chart's bottom bar and choose Pro Lab. Then choose Pairs.
2. Choose the symbols: one of your watchlists or a ready list. Up to 20 symbols are read, which makes 190 pairs.
3. Choose the timeframe (1 hour, 4 hours or 1 day), 500, 1,000 or 2,000 bars, and the window of 60, 100 or 200 bars that the z-score and the test use.
4. Start the scan. To look at a single pair, pick its two symbols under Or one pair and press Inspect.

Reading the results

• Cointegration is graded Strong, Likely, Weak or None by the Engle-Granger test: under −3.34 counts at the 5% level, under −3.90 at the 1% level.
• The hedge ratio is how far the first symbol has moved for each 1% move of the second. The half-life is how many bars it has taken, on average, to close half of a stretch.
• The z-score says how many standard deviations the spread is from its mean now; beyond ±2 the first symbol is rich or cheap against the second.
• Open a pair for its z-score over time, the two prices set to 100 at the start, and a test that enters at ±2, exits at 0 and stops at ±4, without fees.

Good to know

• A symbol that is range-bound on its own is marked and not counted as cointegrated, because any pair with it would look tied without being so.
• The z-score and the test only use the bars before each point, so they never read the future.
• Cointegration found in the past can break: a pair is a statistical relation, not a promise.