Pair Trading Risk Management: Position-Sizing


Stock pair trading is a sophisticated investment strategy. It involves matching a long position with a short position in two stocks. We select pairs with high historical returns correlation, cointegration, and fundamental similarity. Effective pair trading risk management is crucial to success, particularly in the area of position-sizing.

Importance of Position-Sizing & Key Factors:

Position-sizing refers to determining the amount of capital allocated to each trade. Proper position-sizing is vital to mitigate risk and maximize potential returns. Two key elements a trader must address in pair trading risk management are Capital Allocation and Volatility.

We have prepared a short video that explains what we mean. In it, you will see how we apply our Capital Allocation parameters to a trading account using PairTrade Finder®. In a subsequent blog post we will include a second video addressing the Volatility issue:

 

Let Us Help You Develop a Successful Trading Edge

PairTrade Finder®Ultimate Alpha 3.0 is our acclaimed pairs trading software platform.  It encompasses a stock trading system employing advanced pair trading techniques refined over more than a decade.  Why not use a long/short hedge fund stock trading strategy? Researchers of this strategy have empirically demonstrated it to be highly profitable over multi-decades on the S&P 500 (1).  According to one study, US stock pair trading was shown to deliver between 1%-5% per month over the market return for more than 10 years!

What’s more, the strategy has historically increased in profitability during periods of high market volatility. We believe we are likely to experience volatility over the remainder of 2024 given the geopolitical landscape.

Click here to find our library of research demonstrating the historic profitability of the pair trading strategy.

Get Started Today and Prepare to Profit from Market Volatility!

We make a promise to all our new subscribers – to help make you a consistently profitable pair trader within 30 days.  If not, we offer you a money-back guarantee.

Remember, pair trading provides something that most other systems do not – hedged positions to protect you from a market crash.  In fact, stock pair trading through a market crash tends to juice returns even further!

The strategy, when deployed in conjunction with effective pair trading risk management, allows you to start learning your new craft in a safe and stable manner.  We think it represents the best trading strategy for these volatile markets.

What Do You Get with PairTrade Finder®?

When you subscribe to a 15-Day Free Trial of our newest trading software, Ultimate Alpha 3.0, you will get:

  • Our Top U.S. Stock Pair Stars come pre-loaded.  These stock pairs will immediately begin generating high-probability trading signals for you to review
  • Access to our 4-Hour Video Training Course taught by a professional pair trader (the video above is an excerpt from that course). 
  • 17 Tutorial Videos covering all aspects of how to get up and trading ASAP
  • Our eBook Trade Like a Hedge Fund with 11 trading tips from pro pair traders
  • Our 92-page User Manual covering our system, software and philosophies
  • and much more! 

In these resources we cover pair trading risk management, theory, practice, tools and the psychology necessary to successfully trade for consistent profits.

PairTrade Finder® has undertaken billions of backtests and supported millions of pair trades for our customers. It enjoys many, many multi-year subscribers. We think you will see that we have serious value to offer all traders, from novice to expert, retail to institutional.

Happy Trading!

The PairTrade Finder® Team

(1) Nicolas Huck & Komivi Afawubo (2015) Pairs trading and selection methods: is cointegration superior?, Applied Economics, 47:6, 599-613

NB: The example Top US Stock Pair Stars in PairTrade Finder are provided for informational and educational purposes only. They should not be construed as personalized investment advice. It should not be assumed that trading using the parameters demonstrated by the Software will be profitable and will not result in losses. Please see our full Terms & Disclaimer here.

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