crypto_trader/docs/guides/pairs_trading_setup.md

Pairs Trading Strategy - Configuration Guide

This guide walks you through configuring and enabling the Statistical Arbitrage (Pairs Trading) strategy in your crypto trading application.

Overview

Pairs Trading is a market-neutral strategy that profits from the relative price movements between two correlated assets. When the spread between two assets diverges beyond a statistical threshold (Z-Score), the strategy generates signals to trade the reversion.

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Step 1: Navigate to Strategy Management

1. Open your application in the browser (typically http://localhost:5173)
2. Click on "Strategies" in the navigation menu
3. You'll see the Strategy Management page

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Step 2: Create a New Strategy

1. Click the "Create Strategy" button in the top-right corner
2. The Strategy Dialog will open

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Step 3: Configure Basic Settings

Fill in the following fields:

Field	Description	Example
Strategy Name	A descriptive name for your strategy	SOL-AVAX Pairs Trade
Strategy Type	Select from dropdown	Statistical Arbitrage (Pairs)
Primary Symbol	The main asset to trade	SOL/USD
Exchange	Your configured exchange	Coinbase or Binance
Timeframe	Candlestick interval	1h (recommended)

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Step 4: Configure Pairs Trading Parameters

After selecting "Statistical Arbitrage (Pairs)" as the strategy type, you'll see the parameters section:

Required Parameters:

Parameter	Description	Default	Recommended Range
Second Symbol	The correlated asset to pair with	-	AVAX/USD, ETH/USD, etc.
Lookback Period	Rolling window for statistics	20	15-50
Z-Score Threshold	Trigger level for signals	2.0	1.5-3.0

Parameter Explanations:

• Second Symbol: Choose an asset that moves similarly to your primary symbol. Common pairs include:

  • BTC/USD ↔ ETH/USD (highly correlated)
  • SOL/USD ↔ AVAX/USD (Layer 1s)
  • DOGE/USD ↔ SHIB/USD (meme coins)

• Lookback Period: Number of candles used to calculate rolling mean and standard deviation. Higher values = smoother but slower to react.

• Z-Score Threshold: How many standard deviations from the mean before triggering:

  • 1.5 = More frequent signals, smaller moves
  • 2.0 = Balanced (default)
  • 2.5-3.0 = Fewer signals, larger moves

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Step 5: Additional Settings

Setting	Description	Recommendation
Paper Trading	Enable for testing	✅ Start with Paper Trading ON
Auto Execute	Automatically place trades	❌ Keep OFF initially to observe signals

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Step 6: Save and Enable

1. Click "Create" to save the strategy
2. The strategy will appear in your strategy list with status "Disabled"
3. Click the ▶️ Play button to enable the strategy

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Step 7: Monitor the Spread

Once enabled, scroll down on the Strategies page to see the Pairs Trading Analysis section:

• Current Spread: The ratio of Primary Symbol / Secondary Symbol prices
• Z-Score: How many standard deviations the current spread is from its mean
• Signal State: Shows if a signal is active (Long Spread, Short Spread, or Neutral)

Understanding the Charts:

1. Spread History Chart: Shows the ratio over time
2. Z-Score Chart: Shows statistical deviation with threshold lines
   • Green dashed line: Buy threshold (-2.0)
   • Red dashed line: Sell threshold (+2.0)

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Signal Logic

Condition	Signal	Action
Z-Score > +Threshold	SELL	Sell Primary, Buy Secondary
Z-Score < -Threshold	BUY	Buy Primary, Sell Secondary
Z-Score between thresholds	HOLD	No action (neutral)

Example:

If you're trading SOL/USD vs AVAX/USD:

• Z-Score = +2.5: SOL is overvalued relative to AVAX → Sell SOL, Buy AVAX
• Z-Score = -2.5: SOL is undervalued relative to AVAX → Buy SOL, Sell AVAX

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Tips for Success

1. Choose Correlated Pairs: The strategy works best with assets that historically move together. Check correlation before pairing.

2. Start with Paper Trading: Always test with paper trading first to understand signal frequency and behavior.

3. Consider Timeframe:

   • 1h is good for daily monitoring
   • 4h for longer-term positions
   • 15m for more active trading (higher risk)

4. Monitor Volatility: The strategy performs best in ranging/mean-reverting markets. Trending markets can cause losses.

5. Adjust Threshold: If you get too many signals, increase the threshold. Too few? Lower it.

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Troubleshooting

Issue	Solution
No data appearing	Ensure both symbols are available on your selected exchange
Z-Score always near 0	Try increasing lookback period or verify price data is flowing
Too many signals	Increase Z-Score threshold (e.g., 2.5 or 3.0)
Strategy not executing	Check if Auto Execute is enabled in Settings

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Example Configuration

Name: ETH-SOL Mean Reversion
Type: Statistical Arbitrage (Pairs)
Primary Symbol: ETH/USD
Second Symbol: SOL/USD
Lookback Period: 20
Z-Score Threshold: 2.0
Timeframe: 1h
Paper Trading: ON

This configuration would:

1. Monitor the ETH/SOL price ratio
2. Generate a BUY signal when ETH is historically cheap vs SOL (Z-Score < -2)
3. Generate a SELL signal when ETH is historically expensive vs SOL (Z-Score > +2)

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How Execution Works

When you click Start on a Pairs Trading strategy:

1. Strategy Scheduler starts - Runs the strategy on a 60-second interval (configurable)
2. Each tick:
   • Fetches current prices for both symbols
   • Calculates spread ratio and Z-Score
   • If Z-Score exceeds threshold → generates signal
3. Signal execution (if enabled):
   • Executes both legs simultaneously
   • Primary symbol: BUY or SELL based on signal
   • Secondary symbol: Opposite action
4. Status updates visible on Strategies page

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Real-Time Status Panel

When strategies are running, you'll see a green status panel on the Strategies page showing:

• Strategy name and symbol
• Start time
• Number of signals generated
• Last signal type and price
• Last execution tick time

This updates every 5 seconds automatically.