The Workshop · The Trade Desk · one trade at a time · 7 of 11
Long the leader, short the laggard, and the market cancels. What is left is the only thing you had an opinion about.
Lesson 3 split SHOP's return into the market, the sector and its own move. A pair is what you get when you decide to own only the third part. On the evening SHOP was posted at Alpha 65, the weakest name in its sector by the same measure was Enphase Energy (ENPH), at Alpha 10. Long one, short the other, and watch the market fall out of the picture.
An illustration built from the record's data, not a trade the desk posted. The desk's own pairs are chosen by the rules, not by hand.
A dollar of one name is not a dollar of risk. If the short leg swings twice as much a day as the long leg, a dollar-for-dollar pair is mostly a short. The desk sizes every pair so each leg contributes the same daily risk, and the ticket prints that ratio ($1 : $1.39, say) beside the pair. Slide the ratio above and watch the spread line change shape without either leg changing.
Key insight. In a pair you are not long and short two stocks. You are long one thing: the difference between them. The market's day, the sector's day, the Fed's day all hit both legs and cancel. The position only moves when your opinion is tested.
Cycle pairs: a fresh riser against a stale leader in the same sector, the hand-off inside a sector as money rotates. Weakness runs: a weak name against its own sector fund, which is a pair where one leg is the whole sector. Sector pairs (from 2.5, in a dislocation only): a sector fund in its own trend against a sector fund in its own slide, dollar for dollar, out when either sector's tape turns. All are listed with the same tested number, exit and clock as a run, and all are what the desk offers when the tape stops rewarding plain longs.
Pairs on Today's list show both legs, the ratio and the net market exposure of the spread (net β). The Pairs tab holds every pair the desk follows, with the reads the next lesson explains, and every pair has its own page at trademath.com/pairs. The manual's chapter: Hedge pairs.
Keep this: a pair owns the difference and nothing else. Size the legs to equal risk, and the market stops being your problem.
Analytical tools and historical measurements for educational and informational purposes only; not investment advice or a recommendation. Replayed figures are hypothetical: today's rules applied to past prices, after modelled costs, and no account was traded on them. Hypothetical results have inherent limitations and do not represent actual trading. Past performance, including backtested results, does not guarantee future outcomes. Trading stocks involves substantial risk of loss.
The Workshop is education, not advice. Replayed numbers are averages over many trades, after average trading costs (2 bps a side on a stock, 1 on a fund, included for fairness; yours vary by broker and liquidity) unless stated, and are not forecasts; the live record is on the engine page. Analytical tools and historical measurements for educational and informational purposes only; not investment advice or a recommendation. Replayed figures are hypothetical: today's rules applied to past prices, after modelled costs, and no account was traded on them. Hypothetical results have inherent limitations and do not represent actual trading. Past performance, including backtested results, does not guarantee future outcomes. Trading stocks involves substantial risk of loss. About · Support · Terms · Privacy · Refunds Open the deskManualThe EngineChangelog