What is pair trading?

A pair trade is one position made of two. One leg is long — it gains if that asset’s price rises. The other is short — it gains if that asset’s price falls. Both are opened together and sized against each other, so they behave as a single exposure rather than as two unrelated bets.

The consequence is that the market’s overall direction largely cancels. If both assets rise together, the long leg gains and the short leg loses. What is left is the difference between them: whether the asset you are long moved more favourably than the asset you are short. That difference is the thing the position is actually exposed to.

A pair position is not neutral in the sense of being without risk. It removes a common factor and replaces it with a narrower one. A trader holding long ETH against short BTC is no longer expressing a view on whether crypto rises; they are expressing one on whether ETH performs differently from BTC. The exposure moved rather than disappeared.

Both legs still carry the ordinary risks of a leveraged position, including liquidation. Two legs mean two positions that can be liquidated, not one hedged position that cannot.

Because the position follows the relationship, the useful chart is the ratio of one asset to the other rather than either asset in dollars. A ratio chart removes the shared move and shows only what the pair trade responds to. Every pair page on this site is built that way — the headline figure is the ratio, and the dollar prices of the legs are secondary.

Correlation is the usual way to describe how closely two assets have moved together. It is a description of a past window, never a forecast: a correlation computed over 90 days says what those 90 days did, and nothing about what the next 90 will do. Each pair page states the window and the time the figure was computed for exactly that reason.

Most explanations of pair trading are written about stocks, where holding a position overnight costs financing on the short leg and little else. Perpetual futures work differently: each leg pays or receives a funding rate, periodically, for as long as the position is open.

A pair position therefore has two funding legs, and they do not offset automatically. The net cost of carrying the position is the difference between what one leg pays and what the other receives, and that difference can run in either direction depending on the two markets. It is a running cost of the position rather than a one-off, and it applies whether or not the ratio moves at all.

Each pair page publishes the ratio, the correlation of daily returns over a stated window, and the venue figures for both legs, with the time each was computed. The pairs directory lists every market with published statistics, and the asset directory groups them by the asset on either leg.

For the statistical framing of the same idea — measuring a relationship and trading the spread rather than either price — see statistical arbitrage.