#TradingPairs101 Pair trading is an investment strategy that involves buying one asset and short selling another, with the expectation that their prices, which initially diverge, will eventually converge. It is based on the idea that the prices of two correlated assets tend to move together, and that any deviation from that correlation is temporary.

Key elements of pair trading:

Identification of correlated assets:

The first step is to identify two assets that have a high historical correlation, meaning their prices tend to move in the same direction and magnitude.

Divergence and convergence:

It is expected that the prices of the two assets will diverge due to specific market factors, such as news or events.

Betting on convergence:

The pair trading strategy is based on the belief that the divergence is temporary and that, eventually, the prices of the assets will return to their original correlation level.

Buy and short sell:

One asset is bought while the other is short sold, taking advantage of the expectation of convergence.