---
name: pair-trading-6feb52218b18
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

1. **Compute the price ratio**: `ratio = close_A / close_B`
2. **Rolling mean and standard deviation**: `mean = ratio.rolling(lookback).mean()`, `std = ratio.rolling(lookback).std()`
3. **Z-score**: `z = (ratio - mean) / std`
4. **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`

```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

- `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

```bash
pip install pandas numpy
```

## Signal Convention

- Instrument A: `0.5` = long, `-0.5` = short, `0` = flat
- Instrument B: direction is opposite to A


---
Source attribution: HKUDS
Original project: https://github.com/HKUDS/Vibe-Trading
License: MIT
License information: https://opensource.org/license/mit
Original upstream instructions; downloaded from Dave AI.

## Upstream license notice

MIT License

Copyright (c) 2026 Gabriel Moreira

Permission is hereby granted, free of charge, to any person obtaining a copy
of this software and associated documentation files (the "Software"), to deal
in the Software without restriction, including without limitation the rights
to use, copy, modify, merge, publish, distribute, sublicense, and/or sell
copies of the Software, and to permit persons to whom the Software is
furnished to do so, subject to the following conditions:

The above copyright notice and this permission notice shall be included in all
copies or substantial portions of the Software.

THE SOFTWARE IS PROVIDED "AS IS", WITHOUT WARRANTY OF ANY KIND, EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. IN NO EVENT SHALL THE
AUTHORS OR COPYRIGHT HOLDERS BE LIABLE FOR ANY CLAIM, DAMAGES OR OTHER
LIABILITY, WHETHER IN AN ACTION OF CONTRACT, TORT OR OTHERWISE, ARISING FROM,
OUT OF OR IN CONNECTION WITH THE SOFTWARE OR THE USE OR OTHER DEALINGS IN THE
SOFTWARE.



# Dave AI resource metadata

Creator / publisher: HKUDS
Original project: https://github.com/HKUDS/Vibe-Trading
Attribution basis: Upstream repository explicitly recorded in package mirror path

Fields of work: Data & Analytics, Finance & Accounting
Roles: Data Analyst, Financial Analyst
Specialties: API
Tools: Okx, Tushare
Country applicability: Country not specified
Classification basis: Source catalog labels
Instruction SHA-256: 8b3ada6a0c1c86e03676b53b5133c524ca77ffe7f2f5af9fe9847c4673d2e5f7