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Two Leg Entries for Pairs Trading: A Guide to Profitable Spreads & Arbitrage Trading
Two Leg Entries for Pairs Trading: A Guide to Profitable Spreads & Arbitrage Trading

Learn about the new Two Leg Entries feature that will minimize the costs of your Spreads & Arbitrage Trading strategies (Pairs Trading).

Anna Smith avatar
Written by Anna Smith
Updated over a week ago

What is a two-leg entry?

For example, a trader wants to trade the synthetic pair on futures: ADAUSDT / ETHUSDT. Each asset of the spread is called a leg of the spread, which makes two legs in total when trading the spread.

The first leg is ADAUSDT, and the second leg is ETHUSDT.

How does a two-leg entry work for spread trading (pairs trading)?

In the terminal, it is now possible to select a two-leg entry for the Spreads & Arbitrage trading type.

Once the two-leg entry is selected, a Trader must choose the Stop Price of the Spread. Then place the order.

What is the stop price of the spread?

The stop price is the price of the synthetic spread that has to be met to trigger the limit entries. The stop price is calculated based on the comparison of BIDs and ASKs. There are two conditions that it has to fulfill:

  1. Closest BID offer of the one leg must be equal to leg two (highlighted with purple color in picture 1.)

  2. The closest ASK offer of the one leg must be equal to leg two (highlighted with blue color in picture 1.)

Picture 1.

Picture 1.

In this case, we ensure with a high probability (not 100%) that the actual price of the spread a Trader will enter is equal to the stop price that was specified in the TERMINAL.

Two-leg entry execution

Once the Stop Price is reached, the system will place a limit order on each leg (One per each leg).

Example:

If we trade LONG ADAUSDT/ETHUSDT the first limit order will be placed on the closest BID offer (highlighted with purple color in picture 2.) of the ADAUSDT order book and the second limit order will be placed on the closest ask (highlighted with blue color in picture 2.) offer of ETHUSDT.

Picture 2.

Picture 2.

Then the system will wait until at least one limit order is filled, as soon as one limit order is filled another limit order on the other leg will be canceled, and the market order on that leg will be executed to lock the spread price.

The exit from the position will happen in a similar manner. However, unlike the entry, Take profit/stop loss will be used as the Stop Price for the exit.

Note: market enter/market exit actions in the Positions tab will execute market orders.

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