Image Source: Pairs trading is a market-neutral strategy that involves trading two correlated stocks or assets. The idea is to identify pairs that historically move together, and then take a long position in one and a short position in the other when they diverge, with the expectation that they will eventually revert to their mean relationship.The popularity of pairs trading has risen over the years. Naturally, this raises the question: is pairs trading still profitable, and is it worth investing time, money, and resources to find profitable pairs trading strategies?
Pairs Trading: No Longer Profitable
There is a perspective among some researchers and traders that pairs trading may have lost its profitability over time due to increased competition and the efficiency of modern markets.Reference [1] argues that pairs trading is no longer profitable, especially when using basic approaches for pairs selection.
Findings
Reference[1] Sascha Wilkens, .
Pairs Trading: Still Profitable
On the other hand, some argue that pairs trading remains profitable. Reference [2] supports this view, showing evidence of profitability even with classical pairs selection methods like the spread distance approach.
Findings
References[2] Xuanchi Zhu, , 2024, Yale University[3] Gatev, E., Rouwenhorst, K. G., and Goetzmann, W. (2006). Pairs trading: Performance of a relative value arbitrage rule.
Closing Thoughts
In my opinion, pairs trading is still profitable. However, it requires using a pairs selection method that isn’t obvious or widely adopted by others. I was somewhat surprised that, in Reference [2], the author still finds pairs trading profitable using a classical selection method.What’s your experience with pairs trading? Let me know in the comments section.Pairs selection is a critical step in developing a winning trading system. In a future issue, I’ll cover different pairs selection methods that could enhance profitability.More By This Author:
