What to do with equity pair trades when a stock appears in multiple pairs

Hi all, I have searched the forum but haven't found anything that helps with my problem.

So here goes.

I am trying to setup pairs trading strategies with equities but on the final hurdle I seem to have run into a problem I can't solve. The problem is that one stock would come up into multiple pairs. For example the pairs I have would be say stocks

1) long A vs short B
2) long A vs short C
3) long A vs short D
4) long E vs short A
5) long F vs short A

So with stock A being in all the pairs is it common practice just to trade all the pairs? If I trade the first 3 pairs then it would be like taking a triple long position on stock A which seems very risky if stock A takes me into the red. In this case do I trade all 3 pairs (and treat them independently) or is there a way of picking 1 out of the 3 pairs to trade that I can use consistently in the future?

Also if say I trade pair 1 then trade the pair 4 I would end up just having effectively "long E vs short B" while incurring double transaction costs. In this case do I still treat the pairs independently and trade them separately or does it make more sense to trade "long E vs short B"? If so then how can I choose between pair 4 and pair 5?

In my back testing I treated everything independently but in practice this problem is bugging me. It would be greatly appreciated if anyone can share their experiences with me. Any thoughts are also welcome.

Thank you all in advance

is the trades in futures sir i donot under stand how u can long&short the same scrip in equity at the same time

Hi sorry I forgot to explain but basically I am trading the underlying based on over and under-weights measured against the index. but fundamentally I would have the same problem with futures.

You are exactly right and my question is also if it is worth it longing and shorting the same stock and treating them differently.

for example:

Stock A is undervalued relative to Stock B so we long A and short B.

On the other hand Stock A might seem overvalued when looking at its historical relationship with stock E, so in this specific pair we would long E and short A.

So I end up buying A then selling A and end up in the same position I started with looking at the portfolio as a whole. Of course incurring transaction costs along the way.


The second part of my question is exactly that. Depending on which stock it gets compared to, stock A might appear overvalued or undervalued at the same time since the benchmark is different (in this case its stock B and stock E respectively). So is it better to trade each pair independently? or is there a way of picking a pair? or lastly would I just trade the net position i.e. Long E and Short B? (since the long and short of A cancels it out).

in equties shorting is restricted to intraday which increases the risk of losing more hence it is safe to try this pair trading to futures that too on one to one proposition only meaning long A shortB,long C short C or at maximum long 2 lots A &short B&c 1 lot each if u are so cofident of thestrengths of each scrip

in futures u can long stock A in one month&short A in next month but i donot know the cumulative result. in my previous post 2ndline it should be long c&short D & not as in the post

ok thanks, so basically I should choose one pair out of the first 3? but if all 3 pairs are similar in terms of strength of relationship then how do I pick out of the 3? do I just pick a random pair? do you have any ideas on how to eliminate any pairs if I have to pick?

suppose of the pairs sayAB,AC,AD a is long inall the pair on longside u have to choose relative strength of b,c,d to short, i donot know whether i made myself clear anyway think about it

Stock beta should help there..