#TradingPairs101 Pairs Trading: The Market-Neutral Strategy

Pairs trading is a strategy that seeks to benefit from the historical relationship between two highly correlated financial assets. The premise is simple: if two assets usually move together and one temporarily deviates from that relationship, it is expected that they will eventually "converge" again.

The strategy involves opening a long position in the asset that has underperformed (undervalued) and a short position in the asset that has outperformed (overvalued). The goal is not to predict the overall direction of the market, but to bet that the "gap" between the two assets will close. This makes it a "market-neutral" strategy, as it aims to generate profits regardless of whether the overall market rises or falls. It requires careful analysis of correlation and cointegration, as well as disciplined risk management to capitalize on these transient anomalies.