Stock Timing Using
Pairs Logic
Perry KaufmanIntroducing
• The strategy shown here is one of three available on
• The strategies are fully disclosed.
• Two of the strategies apply to stocks, ETFs, and futures.
This one applies only to stocks and ETFs.
• Today’s presentation is a slightly simplified version of the
full program, but is excellent as is.
• You will receive a working (not protected) TradeStation
program which you can modify or run as is. The program
is described at the end of this presentation.
• The website takes this strategy further, creating dynamic
portfolios and processing a large list of stocks and ETFs.Arbitrage
• Arbitrage is one of the great strategies of all time.
• It finds two similar markets that are moving apart
and buys the cheaper and sells the more
expensive, exiting when the come back together.

It’s been done for centuries but now it’s faster.Traditional Approach
To identify trading opportunities, we can
1. Use the ratio (or difference) of two prices
2. Find two stocks (or ETFs or Futures markets) with
correlations between 0.30 and 0.80 (not too strong
or too weak)
3. Use cointegeration (the real method) to decide if
these two stocks move in generally the same
But we won’t. It’s unnecessarily complicated.
We’ll use the Stress Indicator that I introduced in
“Alpha Trading”

Example: Ford(top) v GM(middle) using the ratio (bottom)

• Buy Ford and sell GM when ratio is low
• But what is high and what is low? And what is “normal?”
• Each pair has a different ratio

Using the Stress Indicator
• The Stress Indicator is made up of 3 simple stochastic
calculations (“raw stochastic”), over a 60-day period
• The stochastic is important because it doesn’t lag
• Stochastic 1 (F) = (C(today) – L(60))/(H(60) – L(60))
• Stochastic 2 (GM) = (C(today) – L(60))/(H(60) – L(60))
• Stochastic difference (D)
D = Stochastic1 – Stochastic2
• Stress = (D(today) – L(60)) / (H(60) – L(60))
• Ford is oversold relative to GM when the Stress Indicator
is below 10.
• It is neutral at 50.

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