Pairs Trading in Crypto: A Practical Guide to Market-Neutral Strategies on Any Exchange Tuesday June 10th, 2025 – Posted in: cryptoarbitrage software – Tags: pairs trading, pairs trading software, pairs trading strategy, sharptrader

Introduction

The crypto market is known for its high volatility, unpredictable price swings, and abundance of trading opportunities. While many traders focus on trend-following or momentum strategies, another professional approach that remains relatively underutilized in crypto is pairs trading. This strategy, well-known in traditional finance, involves trading two correlated assets simultaneously to capitalize on the spread between them, rather than trying to predict the market’s overall direction.

Pairs trading strategy is a market-neutral approach, meaning your trades are structured to be less dependent on the overall movement of the crypto market. Instead, you profit from the relationship between two chosen cryptocurrencies—whether prices are rising, falling, or moving sideways. The best part? You can implement this strategy on virtually any major crypto exchange, as long as it offers access to the assets you want to trade and the basic trading tools required.

In this guide, we’ll walk you step by step through the process of setting up and running a pairs trading strategy on your preferred crypto exchange. The concepts and workflow described here are applicable whether you trade on Binance, Bitfinex, Bybit, CEX.IO, Crypto.com, Deribit, HitBTC, HTX, OKX, or any other reputable platform.

Video – How to Setup SharpTrader’s Pairs Trading Strategy for Cryptocurrency Trading

What is Pairs Trading?

Pairs trading is a statistical arbitrage strategy that involves opening simultaneous long and short positions in two highly correlated assets. The core idea is simple: if two assets (let’s call them Asset A and Asset B) have historically moved together, but recently their prices have diverged, a pairs trader will go along the underperforming asset and short the outperforming asset, betting that the spread between them will eventually revert to the mean.

This strategy is market-neutral, meaning it aims to generate profits regardless of whether the overall market rises or falls. The profit comes from the convergence or divergence of the prices of the two selected assets, not from the overall market trend.

Why is pairs trading relevant for crypto?

Crypto markets are highly volatile and sometimes irrational, resulting in frequent mispricing between related assets. For example, different coins in the same sector (such as layer one blockchains, DeFi tokens, or stablecoins) often move in tandem. Still, temporary divergences happen due to news, liquidity shocks, or trading volume imbalances. Pairs trading enables you to capitalize on these opportunities while maintaining a balanced market exposure.

Getting Started: Tools and Preparation

Before diving into the step-by-step setup, let’s make sure you have what you need:

Choosing Your Crypto Exchange and Setting Up

The first step is to select a crypto exchange that meets your needs. Key factors include:

• Liquidity: Look for exchanges with high trading volumes and tight spreads for your chosen pairs.
• Range of Assets: Ensure your exchange offers a diverse selection of cryptocurrencies for various pairings.
• APIs and Tools: If you want to automate the process, check that your platform supports WebSocket APIs for quotes and trading.

Popular exchanges for pairs trading include Binance, Bitfinex, Bybit, CEX.IO, Crypto.com, Deribit, HitBTC, HTX, OKX, and others. Each has its interface, but the core steps for pairs trading are universal.

Trading Platform or Software for Pairs Trading

While some traders execute pairs strategies manually, the most effective and reliable way is to use specialized trading software that supports full automation. For this purpose, we recommend SharpTrader, which comes with a built-in pairs trading strategy module. SharpTrader not only allows you to visualize the correlation between selected assets in real time but also automates order execution, risk management, and position balancing. This eliminates human error and enables you to run your pairs trading strategy 24/7, regardless of market conditions. SharpTrader supports integration with multiple crypto exchanges via API, making it a versatile choice for traders looking to streamline and automate their workflow.

Understanding Correlations

Successful pairs trading depends on identifying highly correlated assets. This typically requires software that can calculate correlation coefficients over custom timeframes, visualize spreads, and alert you when opportunities arise.

Step 1. Selecting the Crypto Exchange and Symbols

In our demonstration, we start by connecting to Binance. Most modern trading platforms allow you to connect to multiple exchanges; however, for this guide, we will focus exclusively on Binance due to its high liquidity and broad asset selection.

Choosing Crypto Quotes and Symbols

• Start by selecting the “Crypto” market type within your trading interface.
• Ensure your platform is set to receive real-time quotes from Binance.
• You may notice other exchanges are available; however, Binance is recommended due to its robust infrastructure and diverse trading pairs.

When selecting symbols for pairs trading, look for assets that have historically demonstrated a high degree of correlation. In our example, we picked a couple of symbols (such as ADA/USDT and XRP/USDT) that have historically moved in tandem. However, you are free to experiment with other pairs based on your research or trading preferences.

Pro Tip:
The choice of pairs is critical. Analyze historical data for correlation coefficients—values closer to +1 indicates a stronger positive correlation. Tools like SharpTrader, TradingView, Binance’s analytics, or your trading platform’s built-in features can help.

Step 2. Adding Symbols to  “Indices”

With your target symbols identified, the next step is to add them to your trading indices:

• In your trading platform, locate the section or panel that lists available symbols.
• Right-click on your chosen symbols (e.g., ADA/USDT and XRP/USDT).
• Select “Add to indices” or a similar option.

This process allows you to group selected assets for further analysis and trading strategy configuration. Once added, you should see both assets listed in your indices with all required parameters, such as current price, bid/ask spread, trading volume, and other relevant statistics.

Why is this important?
Grouping symbols in indices makes it easier to compare, correlate, and manage your trading pairs, especially if you’re running multiple strategies or monitoring several pairs at once.

Step 3. Configuring the Binance Exchange (as example) Details

Navigate to the crypto trading tab or section of your platform dedicated to exchange configuration.

• Select Binance as your primary exchange.
• Confirm that real-time price quotes are being received. This is crucial for up-to-date analysis and timely trade execution.

Some advanced trading platforms allow you to set API keys, configure order routing, and customize quote intervals for better precision and faster response times.

Fig. 1 – Adding Binance session

Fig. 2 – Adding API keys

Step 4. Setting Up the Pairs Trading Strategy

Now that your environment is ready, it’s time to configure the pairs trading strategy itself.

Adding the Strategy

Fig. 3 – SharpTrader Pairs Trading Strategy “Settings” tab. 

1. Click “Add Strategy”:
   Most platforms have an “Add Strategy” button or menu. Select this to begin the setup process.
2. Select “Pair Trading”:
   From the list of available strategies, choose “Pair Trading.” Click OK or confirm.
3. Configure Basic Settings:
   You’ll typically see a window with strategy parameters. Here, you’ll decide which symbols to work with.
   • If your symbols are already listed, select them.
   • If not, add them manually by typing in their tickers (e.g., ADAUSDT, XRPUSDT).

Fig. 4 –SharpTrader Pairs Trading strategy “Instruments and Orders” tab.

4. Correlation Analysis:

• • Click the “Correlate” button or equivalent to analyze historical correlation between your chosen pairs.
  • Adjust the period and timeframe for correlation calculation. For example, you might use a 1-hour window with 1-minute candles.
  • Choose “Single Session” if you want to restrict trades to a single trading session.
  • Make sure “Binance Futures” or your preferred market is selected.
  • Click “Recalculate” to update the analysis.

Fig 5. –SharpTrader Pairs Trading strategy Correlation tab

Example:
After recalculating, you may find that Ripple (XRP/USDT) and Solana (SOL/USDT) have a high correlation, as do ADA/USDT and XRP/USDT. For this setup, we’ll use ADA/USDT as the first symbol and XRP/USDT as the second.

Step 5. Balancing Position Sizes and Margin

One crucial aspect of pairs trading is ensuring that your position sizes (lots) are balanced in a way that neutralizes your risk exposure. This often means that the notional (dollar) value of each position should be equal, not just the number of coins.

Price-Based Second Lot Calculation

• Select the option for “Price-Based Second Lot Calculation” or similar.
• This feature recalculates the position size of the second asset so that both trades use approximately the same amount of capital.
  For instance, if you want to commit around $70 to ADA, you might set the ADA lot to 100 units, and the platform will automatically calculate the equivalent lot size for XRP.

Balancing your lots ensures that your gains and losses are proportional, maintaining the market-neutral nature of the strategy.

Step 6. Risk Management – Setting Stop Loss and Take Profit

Effective risk management is essential for long-term success in trading, and pairs trading is no exception.

Key Risk Parameters:

• Stop Loss:
  Protects your capital by automatically closing a position when it moves against you by a predefined amount. For this setup, use the default stop loss provided by your platform, unless you have a specific value in mind based on your backtesting results.
• Take Profit:
  Closes the position when your profit target is reached. Set this to an amount that aligns with your risk/reward profile.
• Minimum Profit:
  Set the minimum profit threshold to $5, for example, ensuring that trades are only executed when the expected return justifies the effort and risk.
• Trailing Distance & Step:
  Trailing stops lock in profits as the market moves in your favor. A trailing distance of 1 and a trailing step of 0, as used in this example, are reasonable starting points.
• Timeframe & Period:
  Select a 1-minute timeframe and a period of 60 (i.e., 60 minutes) to analyze and monitor the correlation between pairs over the past hour.

Tip:
Constantly adjust these parameters based on your risk appetite, volatility of the selected pairs, and historical performance.

Step 7. Finalizing the Setup – Z-index and Order Execution

One unique parameter often found in pairs trading systems is the Z-index. This metric determines how far the price spread must deviate from its historical mean before a trade is triggered.

• Recommended Z-index:
  Set the Z-index to a value between 3 and 5. In this example, we use 4. This means trades will only be executed when the spread is at least 4 standard deviations away from the mean, indicating a statistically significant opportunity.

Once all parameters are set, the system is ready to monitor the market and execute trades when the predefined conditions are met.

Step 8. Monitoring, Managing, and Closing Trades

After activating your pairs trading strategy, the next step is active monitoring. Most trading platforms provide real-time dashboards showing open positions, profit/loss, spread behavior, and risk metrics.

What to Watch For:

• Ensure both legs of the pair open and close as intended.
• Watch for sudden changes in correlation. Sometimes, external factors (like news events or liquidity shocks) can break historical correlations temporarily or permanently.
• Be prepared to adjust parameters if market conditions change. For example, you might need to widen your stop loss or tighten your minimum profit if volatility spikes.

Closing Trades:
The system will typically close trades automatically based on your take profit, stop loss, or if the spread reverts to the mean. However, always be ready to intervene manually if market conditions warrant.

Pairs Trading Best Practices and Advanced Tips

1. Backtesting:

Before trading with real money, it’s crucial to test your pairs trading strategy in a safe environment. SharpTrader offers a built-in emulation (simulator) mode specifically for this purpose. To enable it, go to the settings tab and activate the emulator option. In this mode, the software will record all simulated trades in memory, executing your strategy logic as if trading live, but without sending any real orders to the exchange. This allows you to thoroughly backtest your pairs trading setup, analyze expected returns, risk, and win rate—completely risk-free. Only after achieving satisfactory results in emulation should, you consider running the strategy with real funds.

2. Diversification:
   Don’t rely on a single pair. Consider running several pairs simultaneously, provided they don’t all move together. This spreads your risk and increases the likelihood of finding profitable opportunities.

1. Regular Correlation Analysis:
   Correlations can and do change over time. Re-run your correlation analysis periodically (weekly or monthly) to ensure that your pairs remain valid.
2. Automate Alerts:
   Use alerts to notify you when correlations weaken, spreads widen beyond historical norms, or unusual trading activity occurs.
3. Stay Informed:
   Crypto is highly sensitive to news, regulations, and market sentiment. Stay updated with the latest industry developments.

Conclusion

Pairs trading is a powerful strategy that allows crypto traders to profit from price discrepancies between correlated assets while minimizing exposure to overall market movements. By carefully selecting pairs, balancing position sizes, and applying disciplined risk management, you can add a robust, market-neutral tool to your trading arsenal.

Using Binance as your exchange of choice ensures access to deep liquidity and a wide variety of potential pairs. With the right setup—whether through manual analysis or automated trading platforms—you can harness the unique volatility of the crypto market for consistent, controlled returns.

Ready to get started?
Begin by identifying your target pairs, configuring your trading environment as outlined above, and always prioritize risk management. With patience, discipline, and a data-driven approach, pairs trading can become a cornerstone of your trading strategy.

If you want to see these steps in action, check out our full video tutorial on YouTube, where we walk through every stage on the Binance platform. Good luck and happy trading!

Have questions or want to share your own experience with pairs trading in crypto? Leave a comment below or reach out to our community for support and insights!