The Workshop · The Trade Desk · one trade at a time · 11 of 11
Stretched or ordinary. Closes or drifts. What the last times looked like. Three reads before you own a difference.
Lesson 7 built a pair: long Shopify (SHOP), short Enphase Energy (ENPH), sized to equal daily risk. This lesson is about the three questions to ask that pair before you own it, each answered from the spread's own history and nothing else. Drag the day marker: the top chart shows where the spread comes from on that day, the bottom chart reads it.
Take the spread's last 120 sessions and ask where today's level sits among them, from 0 (never lower) to 100 (never higher). That is the stretch, and it is the pair's own thermometer: it only knows this one pair, so 90th means "high for these two", whatever the market is doing. A pair is a bet that a gap closes. There is no gap to bet on in the middle of the range, and the top and bottom quarters are where the bet exists.
A spread that has returned toward its average after every excursion is a spread you can fade. One that has walked steadily in one direction for six months is not a pair at all; it is a trend wearing a pair's clothes, and fading it is standing in front of it. The desk grades the last 120 sessions into three words: closes (gaps have tended to close inside a trade's window), closes slowly, or drifts. On the board and the pair page the word is printed beside every pair.
The most honest read is a count. Of the earlier times this spread sat at least this far from its average, how many had closed half the gap ten sessions later? Six of eight is a spread that comes back; one of seven is a spread that keeps going. The number is small (a year holds only a handful of such episodes), so it is a read to weigh, not a verdict, and the pair page shows it only when the spread is stretched now.
Key insight. None of these three predicts. They describe how this pair has behaved, which is the only thing you can know before the trade. A pair with a wide stretch, a "closes" history and a good count is a pair whose bet has paid before. A pair with a wide stretch and "drifts" is a warning, however tempting the gap.
The Pairs tab on the desk and the board at trademath.com/pairs carry stretch, closes or drifts, the net market left over and the Alpha gap for every pair, with filters for each; the pair page adds the count of past stretches and the hand-off read. The Pairs tab also draws each leg against the market over the same window, with the gap between them shaded: the pair is that gap. Star a pair to watch it: it joins your watch list beside your names, and on Pro the desk emails you the evening it stretches, comes back, or a leg crosses a line. The manual: Finding a pair.
Keep this: before a pair, three questions. How stretched, does it close, what happened last time. The answers are in the spread's own history, and the desk prints them.
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