How do you set stops for pairs trades?

Hi all,

I am new to pairs trading after having mixed success (mostly to the downside) with directional trading for the past couple of years. I am trying to take in all the new info required to trade pairs. One thing I am struggling with is how to define risk for each pairs trade and setting stops accordingly. I am currently not using stops for mean reversion pairs trades however I can imagine this is not the best idea in the long run.

So my questions is how do you go about setting stops on each leg of your pairs trade, if you do infact use stops?


Thanks in advance,

Dave

Should check out - Trading
I'm not trading stock pairs but this guy appears to have a good background. From my understanding of it, stop should be same distance as target and statistics should be used to find your pairs. As long as pair relationship holds up then shouldn't hit stop. This was just my take from what he has said.

fiftyfifty said:

Should check out - Trading
I'm not trading stock pairs but this guy appears to have a good background. From my understanding of it, stop should be same distance as target and statistics should be used to find your pairs. As long as pair relationship holds up then shouldn't hit stop. This was just my take from what he has said.

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Thanks mate, I'll have a look into that.

You exit at the price levels that signal a return to the mean.