Top Stock Pairs for Mean Reversion Strategies
Quick Answer
The best stock pairs for mean reversion are large-cap pairs within the same sector that show strong statistical cointegration (ADF < -3.5) and high correlation (>0.85). Below are5 live examples from Pair Parade's free tier (ranked 101-105 by PP Score). These pairs have stable relationships, short reversion times (5-10 days), and high liquidity for easy execution.
What Makes a Great Mean Reversion Pair?
Not all stock pairs are suitable for mean reversion trading. The best pairs share four critical characteristics:
Strong Cointegration
ADF statistic below -3.5 indicating stable long-term relationship
High Correlation
Correlation above 0.80 ensures stocks move together consistently
Short Half-Life
Mean reversion within 5-15 days for faster trade cycles
High Liquidity
Large-cap stocks with tight spreads and deep order books
Example Pairs from Pair Parade
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Best Sectors for Pair Trading
Some sectors produce more reliable pairs than others. Banking and energy sectors typically offer the strongest statistical relationships. The pairs shown above are real examples from Pair Parade's database, demonstrating the types of relationships that work well for mean reversion trading.
Why certain sectors work better:
- Banking: All banks face the same interest rate environment and regulatory pressures
- Energy: Oil companies share exposure to crude prices and refining margins
- Technology: Large-cap tech stocks move together on sector sentiment and innovation cycles
- Consumer: Similar sensitivity to economic cycles and consumer spending
How to Evaluate Pairs
Use this checklist when screening for mean reversion pairs:
Same Sector or Industry
Pairs must face similar market forces. Cross-sector pairs rarely maintain stable relationships.
ADF Statistic Below -3.5
Strong statistical evidence of cointegration. Below -4.0 is exceptional.
Correlation Above 0.80
High correlation ensures stocks move together. Below 0.70 is too weak for reliable trading.
Half-Life 5-15 Days
Short enough for multiple trades per year, long enough to avoid excessive transaction costs.
Large Cap Stocks
Market cap above $10B ensures liquidity, tight spreads, and stable business models.
Stable Hedge Ratio
The beta (hedge ratio) should remain relatively constant. Large fluctuations indicate unstable relationships.
Discover Top Pairs Instantly with Pair Parade
Finding high-quality mean reversion pairs requires screening thousands of combinations and running complex statistical tests. PairParade identifies the best pairs for you, with real-time updates and trade signals.
✓ Pre-Validated Pairs
All pairs tested for cointegration daily
✓ Sector Filters
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Frequently Asked Questions
Do these pairs work in all market conditions?
No pair works perfectly in all conditions. During extreme market stress (financial crises, pandemics), even strong pairs can temporarily decouple. That's why proper risk management with stop losses is essential. The pairs listed here have demonstrated resilience across multiple market cycles.
Should I trade multiple pairs simultaneously?
Yes, diversification across multiple pairs reduces risk. However, avoid too many pairs from the same sector (sector risk). A portfolio of 5-10 pairs across different sectors is ideal for most traders.
How often do pair relationships break down?
Permanent breakdowns are rare for well-chosen pairs but can happen due to mergers, business model changes, or regulatory shifts. Re-test cointegration quarterly. Temporary breakdowns during earnings season or major news events are normal and often present the best trading opportunities.
Are small-cap pairs ever better than large-cap pairs?
Small-cap pairs can show stronger statistical relationships but suffer from liquidity issues, wider spreads, and higher volatility. For most traders, the consistency and execution advantages of large-cap pairs outweigh any statistical edge from small caps.