#TradingPairs101 Pair trading is a market-neutral investment strategy that seeks to identify two assets with similar price movements and then trade the difference between their prices. The idea is that, even with market fluctuations, a pair of assets with a stable price relationship (or historical average) can present profit opportunities when that relationship deviates from the average.

How pair trading works:

1. Identifying pairs:

The first step is to find two highly correlated assets, such as stocks of companies in the same sector, or funds with similar characteristics.

2. Analyzing the price relationship:

It is important to analyze the historical relationship between the prices of the assets, checking for trends of convergence or divergence.

3. Trading the price difference:

When the price relationship deviates significantly from the historical average, the trader can open a long position in one of the assets and a short position in the other, seeking to profit from the eventual correction of the price relationship.

4. Profit:

When the price relationship returns to the historical average (or converges), the trader can close the positions, obtaining a profit.

Advantages:

Market-neutral:

The strategy does not depend on the overall market direction, allowing profits in both bullish and bearish trends.

Lower risk:

Since the operation is conducted with two correlated assets, the risk can be lower than in individual operations.

Profit opportunities:

The strategy can identify profit opportunities in different market conditions.

Disadvantages:

Complexity:

The strategy can be complex to implement, especially for beginner traders.

Transaction costs:

Pair trading can involve transaction costs, which may reduce profits.