Which Stocks Make the Best Pairs Trades

Learning how to find pairs trade is one of the easiest skills to learn, and it can also be the simplest way to sow the seeds of victory in a traders’ account. 

Think of pairs trading as the perfect hedge in a market that’s difficult to trade……

Sounds familiar, like 2022, maybe?

Before I dive into all the methods I use when looking for pairs trades, it’s always helpful to review the basics.

A pairs trade is when a person puts on a two-legged position. By that, I mean you’re going long one stock while also shorting another.

The strategy also involves matching the long and short positions in two stocks with a high correlation — cousin stocks, like going long Amazon and shorting the Chinese version of it, Alibaba.

The goal is to make gains when the stock goes up while also making gains on the other stock going down.

When I look for pairs trades, I don’t just want a random stock that’s going up some days at the same time as the other stock is.

I’m looking for this

How to Find the Perfect Pairs Trades Everytime

When learning how to find pairs trades, it’s important to look for two stocks that are linked. The stocks must have an association and correlation between them — that’s the secret sauce and the recipe doesn’t work without it.

Linked trades make it more likely that the day one stock is going up, the other stock will fall — so they’re inversely correlated. 

I can almost guarantee you’re already seeing some on the market right now, you just haven’t realized it yet.

We’ll have days on Wall Street where a technology stock is up, and then that same day you’ll see defensive stocks like pharmaceuticals are down. 

However, when I’m looking for a pairs trade with stocks in the same sector, I have to do things a bit different…

Watch the video to learn more about how to find pairs trades, and which stocks make the best pairs. 

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