How to set up a Pairs trade

Have you been eyeing two underlyings and noticing that they trade opposite of one another? If so, then you can put the Pairs trade mode to work in the desktop trading platform.


What is a pairs trade?

A strategy used when two underlyings move opposite of each other

A pairs trade is a trading strategy placed on two underlyings that you expect to trade opposite of each other after a period of positive correlation. In the world of trading, this referred to as a divergence. As a result, to employ a pairs trade, you would go long one underlying and short the other. Ideally, to profit from a pairs trade, you would expect your long position to appreciate and your short position the depreciate. 

What can  I trade with Pairs Trade mode?

You can establish a pairs trade between two stocks, ETFs, or outright futures contracts. The Pairs Trading mode cannot be used for equity options or options on futures. Furthermore, pairs trades can only be set up with the same product type, i.e., long stock/short stock and not long stock/short future.

For example, if you love shoes and follow the stock performance of two competing brand's stock, then you can set up a pairs trade between them. Or, if you believe two sectors move opposite each other, then a pairs trade can be employed between two ETFs. Lastly, you can place between different asset classes with futures.

Things to keep in mind before placing a Pairs trade

There are a few things to keep in mind when placing a pairs trade in the Pairs Trade Mode:

  • Pairs orders have additional order execution risk as they are routed as separate orders and may not fill at the same time.
  • Working pairs trade orders route to the market based on the selected condition (≤ or ≥) and the Trigger price.
  • Triggered Pairs trades route only as Market Orders, and as a result, do not guarantee a specific fill price. Please consider the bid-ask spread of each underlying entered in a Pairs Trade.
  • A working Pairs trade will display as a pending order if it does not immediately fill after sending. The order will route as a market order once the trigger price and condition are met.
  • Pairs trades for stocks/ETFs can only route during the normal trading session (no extended hours).

What kind of account do I need to place a pairs trade?

Must have the highest margin trading level, The Works or IRA The Works

Since a pairs trade consists of a long stock/ETF position and a short stock/ETF position, you must have the highest margin trading level–The Works

Furthermore, to establish a futures pairs trade, it will not only require that you have The Works, but you must also have futures enabled. Moreover, IRA accounts can establish a futures pairs trade, but it will require that you have IRA The Works.

To learn more about our account types and trading levels, please click here. Or, if you already have The Works, and are looking to enable futures trading, then please click here.

How do I place a Pairs Trade?

Navigate to the Trade tab and select the Pairs Trading mode

To enter a pairs trade on the desktop trading platform, first, navigate to the Trade tab, and click the Pairs trade mode. The Pairs trade mode window will appear, as pictured below. Or, select Pairs from the Trade Mode dropdown menu if you do not see different Trade Mode buttons.

Location of the Pairs Trading Mode

After the Pairs trade mode appears, you may enter the two symbols you wish to pairs trade into the symbols field (yellow arrows) and the quantity you wish to buy and sell (blue arrows). The quantity for each underlying does not have to equal.

Symbol and quantity entry in the Pairs Trading Mode

At the bottom of the Pairs trade window (green box), you may enter a price spread Trigger, calculated from the mid-price sum of both underlyings (long position MINUS short position). Then, select the condition you wish to the pairs trade order to trigger based on being ≤ or ≥ (less than or equal to/greater than or equal to) the spread Trigger price.

Price condition and price entry

Before clicking Review and Send, you can view a combined 1 Day: 1 Year price chart of both underlyings by clicking the chart icon. The price displayed in the chart will coincide with the listed Trigger when unlocked.

Combined 1D:1Yr price chart of both underlyings

Additionally, you can revisit this pairs trade at another time by clicking the book icon and clicking the green + icon. You can quickly line up saved pairs trades by clicking on the pairs symbol. To remove a Saved Pairs trade, place your cursor over the pairs symbol trade, right-click, and choose Remove. Saving pairs trades can also help you with lining up a closing pairs trade order after the order fills. We'll go over closing pairs trade in a different section below.

Accessing saved pairs trades

To place the Pairs trade you have lined up, click Review & Send. The Review & Send screen will appear from the bottom (yellow box). You can view and switch the account you wish to route the trade, as well as Estimated Trade Costs, as illustrated below.

Review and Send screen in the Pairs Trading Mode

How do I close a Pairs Trade Order?

Return to the Pairs Trading Mode and Flip the Order

Before lining up closing pairs trade order, your original pairs trade order must fill. After the pairs trade order fills, return to the Pairs Trading mode. If your original pairs trade order populates into the symbol fields, then all you need to do is click the swap icon , as illustrated below.

However, if your original order did not auto-populate, then you must enter closing pairs trade manually. To manually enter a closing pairs trade, enter your long position in the sell symbol field (orange box) and your short position in the buy symbol field (white box).

Lastly, if you have your original pairs trade saved, then you can click the on the trade and select the swap icon.

How do I view the details of a working pairs trade order?

Locate the working order, right-click, and select View Complex Order

Locate either working pairs trade orders on the platform. In this example, we'll view the working pairs trade in the Activity tab. After locating, right-click on either working order and select View Complex Order. The details of the pairs trade will appear beneath the order, as pictured below.

Viewing the details of a working pairs trade

How do I edit a working pairs trade order?

Locate the working order, right-click, and select Replace Complex Order

To edit and replace a working pairs trade order, first, start by locating the working order. In this example, we'll view the working pairs trade in the Activity tab. 

After locating your working order, you will see that your pairs trade consists of two separate working orders. To edit your working order, place your cursor on either working order, and select Replace Complex Order.

Location of Replace Complex Order after right-clicking on a working pairs trade

The Pairs trading mode window will appear where you can adjust your trigger price and the condition (outlined below).

Allowable adjustments to a working pairs trade

How do I cancel a working pairs trade order?

Locate the working order, right-click, and select Cancel Complex Order

To cancel your pairs trade, locate the working pairs trade order. Then right-click on the working order and select Cancel Order. After selecting Cancel Order, both orders in the pairs trade will cancel. There is no way to cancel one-half of a working pairs trade since both order work in tandem with the trigger price and condition.

Location of Cancel Order after right-clicking on a working pairs trade order

How do I view the notional multiplier for futures? 

Viewing the notional multiplier for a futures pairs trade instead of the contract's spot price

By default, Pairs Trade mode will display the net difference based on the contract's spot price when lining up an outright futures pairs trade. However, if you wish to view the notional multiplier instead, you can turn on that option by going to the desktop platform Settings menu. By checking Pairs Trade Trigger Threshold includes Notional Multiplier for Futures, the trigger price will display the notional multiplier.

location of enabling futures notional value for pairs trading

After enabling, any outright futures pairs trades will display in its notional multiplier in the Trigger price field.

Example of futures notional value enabled in Pairs Trade mode