#TradingPairs101 Trading pairs involve identifying two highly correlated financial instruments, such as stocks, funds, or indices, that temporarily diverge from their historical price relationship. This strategy involves buying undervalued securities (long position) while simultaneously selling overvalued securities (short position), aiming to profit from the anticipated price convergence.

*Key Elements:*

- *Correlation Analysis*: Identifying pairs with strong historical correlation, such as Coca-Cola (KO) and Pepsi (PEP), which tend to move together due to similar market factors.

- *Spread Analysis*: Measuring the price difference (spread) between two instruments to determine when it diverges from its historical average, indicating potential trading opportunities.

- *Mean Reversion*: Assuming that the spread will revert to its historical average, allowing traders to profit from convergence.

*Types of Trading Pairs:*

- *Convergence Trading*: Betting that the spread will decrease as prices converge.

- *Divergence Trading*: Betting that the spread will increase as prices diverge further.

*Risks and Considerations:*

- *Market Risk*: Changes in market conditions can affect both positions, potentially leading to losses.

- *Model Risk*: Incorrect assumptions about correlation or mean reversion can result in losses.

- *Execution Risk*: Difficulties in executing trades at desired prices, especially for short positions ¹ ².

*Popular Trading Pairs:*

- *Indices*: S&P 500 (SPX500/USD) and Nasdaq (NAS100/USD), which can be traded on platforms like Oanda.

- *Stocks*: Pairs such as Coca-Cola (KO) and Pepsi (PEP) or other companies in the same sector ³ ⁴.