What is pair trading and how does it work?
Pair trading is a market-neutral trading strategy where you simultaneously buy one stock (go long) and sell another related stock (go short). The idea is that two historically correlated stocks will continue to move together. When they temporarily diverge from their normal relationship, you profit from the convergence back to the mean. This strategy reduces market risk because your profit comes from the relative movement between the two stocks, not the overall market direction.
What is cointegration and why is it important?
Cointegration is a statistical property that indicates two price series have a stable, long-term equilibrium relationship. Unlike correlation, which measures how stocks move together moment-to-moment, cointegration tells us whether the spread between two stocks is mean-reverting. A cointegrated pair will always revert to its mean spread over time, making it ideal for pair trading. We use the Augmented Dickey-Fuller (ADF) test with a threshold of -2.5 to identify cointegrated pairs.
How do I read the Z-score and when should I trade?
The Z-score measures how many standard deviations the current spread is from its historical mean. A Z-score of +2 means the spread is 2 standard deviations above the mean (Stock X is overvalued relative to Stock Y). A Z-score of -2 means the opposite. Typically, traders enter positions when |Z-score| > 2 and exit when Z-score returns toward 0. Our signals suggest: BUY (go long X, short Y) when Z < -2, SELL (short X, long Y) when Z > +2, and WAIT when -2 < Z < +2.
What is the ADF statistic and what values should I look for?
The ADF (Augmented Dickey-Fuller) statistic tests whether a time series is stationary (mean-reverting). For pair trading, we apply the ADF test to the spread between two stocks. More negative ADF values indicate stronger mean reversion. We use a threshold of -2.5; pairs with ADF statistics below this threshold are considered cointegrated. ADF values of -3.0 or below indicate very strong cointegration and are often the best trading candidates.
What is beta-neutral position sizing?
Beta-neutral position sizing ensures your overall position has minimal exposure to market direction. Using the hedge ratio (beta) from OLS regression, we calculate how many lots of Stock Y to trade against Stock X so that market movements don't affect your P&L. For example, if beta is 1.5, you would trade 1 lot of X against 1.5 lots of Y. Our lot size recommendations automatically account for NSE F&O lot sizes to give you practical, tradeable quantities.
Why do you only analyze NSE F&O stocks?
We focus on NSE Futures & Options (F&O) stocks for several reasons: (1) F&O stocks have high liquidity, making it easier to enter and exit positions; (2) You can actually short these stocks using futures contracts, which is essential for pair trading; (3) Standardized lot sizes make position sizing straightforward; (4) The F&O universe covers 200+ of India's largest and most actively traded companies across all major sectors.
How often is the analysis updated?
QuantPair runs automatic analysis every trading day at 10:30 AM IST. This timing is chosen because Yahoo Finance updates with the previous day's closing prices overnight, ensuring our analysis uses the most recent data. We analyze all pairs within each sector and update Z-scores, trade signals, and lot recommendations daily. You can also manually trigger analysis from the Dashboard if needed.
What is the error ratio and why does it matter?
The error ratio measures the relationship between the regression residuals (spread) and its standard deviation (sigma). A lower error ratio indicates a tighter, more predictable spread between the two stocks. Pairs with lower error ratios tend to have more consistent mean reversion, making them better candidates for pair trading. We display this metric to help you identify the highest-quality pairs.
How do I add pairs to my watchlist?
After running analysis, you'll see a table of cointegrated pairs. Click the '+' button next to any pair to add it to your watchlist. The watchlist tracks entry prices, current prices, Z-scores, and calculates your live P&L. You can view your watchlist from the sidebar navigation. Note: You need to be logged in to save pairs to your watchlist - your data is stored securely and synced across devices.
Is QuantPair free to use?
Yes, QuantPair is completely free. We believe retail traders deserve access to the same quantitative tools used by institutional investors. We don't charge subscription fees, don't sell trading tips, and don't require payment for any features. The tool is supported by advertisements. We're committed to keeping it free and accessible for all Indian traders.
Is this SEBI registered investment advice?
No. QuantPair is an educational and analytical tool, not a SEBI-registered investment advisor. The analysis, signals, and recommendations provided are purely statistical in nature and should not be construed as investment advice. All trading involves risk, and past statistical relationships may not continue in the future. Please do your own research and consult a qualified financial advisor before making trading decisions.
What data source does QuantPair use?
We use Yahoo Finance API to fetch historical price data for all NSE stocks. Specifically, we download 200 days of adjusted closing prices for each stock. Lot sizes are fetched from official NSE F&O data to ensure accurate position sizing. The data is refreshed daily before our 10:30 AM IST analysis run.