Considerations

When Pair-trading, there are a number of factors to consider, including:

• Choosing which asset to long
• Choosing which asset to short
• Selecting leverage
• Entry level and when to take profit
• Liquidation levels
• Fundamental analysis
• Technical analysis

More advanced factors to consider include:

• Net funding costs
• Slippage
• Correlation between the two assets
• Rebalancing the long and short exposure (beta)
• and many others...

Net Funding

Traders will likely pay funding on one leg, and receive funding on the other leg. We have provided the ability to dynamically observe the net funding rates directly on the platform when you chart any 2 pairs.

Slippage

Sometimes one asset will have more liquidity than another leg. Users must consider slippage when entering and exiting a trade, especially once you are trading significant size outside of the top 20 cryptocurrencies.

Correlation Between Two Assets

Pair trading has a rich academic history, grounded in statistics. Generally speaking, people look to trade two assets that are closely correlated but where they either expect some deviation between the two assets, or a mean reversion of some sort. Pear is working on tooling to analyze correlation between the offered pairs.

Rebalancing

Rebalancing the long and short exposure (beta): by default each trade starts off ‘dollar-neutral’ at inception, meaning if a trader opens a $1000 trade then$500 will be long exposure, and $500 will be short exposure.

As the trade goes in the trader's favor, the value of the long will rise to say $550, whilst the value of the short may fall to$480 (resulting in a +$50 -$20 = +$30 gain) for the user.

At this stage, the user is net long the market ($550 vs$480). To rebalance their ‘beta’, an advanced trader would take some profit on the long leg and add it to the short leg, but for most traders this will not be a consideration and they’ll just look to close both trades outright at the same time.

Pear has added the flexibility to choose what % you are long and short at inception (e.g. 60%/40% vs. 50%/50%), as well as the ability to partially close trades.