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A pair trade involves trading two stocks simultaneously, buying one and selling the other at predefined price differences. Usually, the two stocks selected have displayed a close price relationship in the past, or the relationship is dictated by fundamentals. When this relationship approaches a certain, extreme level, a position is established in which the relatively overvalued stock is sold short and the other one is bought for approximately equal dollar values. It is expected that eventually the relationship will return to a normal level, at which time the position is unwound at a profit.
Stock-stock pair combinations can only be traded as non-guaranteed. To help increase the chances that both legs will fill, stock-stock scale pairs can only be sent as:
To create a scale stock pair trade based on price difference
1. Open the ScaleTrader.
- From within Mosaic, use the New Window dropdown and select More Advanced Tools and then ScaleTrader.
- From within the Advanced Order Management quote monitor, use the Trading Tools menu.
2. Select the Pair tab and click the Edit Pair button.
3. Create tickers for each of the stock-stock pair:
- Enter the higher priced of the pair in the Buy line.
- Enter the lower priced (but relatively overvalued) of the pair in the Sell line.
4. Choose price difference and click Create.
Note: At this point you will be required to acknowledge that the combo is non-guaranteed.
The scale chart shows the price difference between the two contracts over time. The starting price illustrates the beginning level of price difference between the two contracts at which you want to submit an order.