#TradingPairs101

Trading pairs are a popular strategy that involves matching a long position with a short position on securities with a high correlation. Here's a breakdown of what you need to know:

*What are Trading Pairs?*

Trading pairs are two assets with a high positive correlation that are used to create a market-neutral position. This strategy is based on the concept of mean reversion, which assumes that assets trading above or below their average will revert to the mean over time ¹.

*How Does Pairs Trading Work?*

To perform a pairs trade, you'll go short on the asset that's trading above its historical range and long on the asset that's trading below it. The goal is to profit from the relative returns as the assets revert to their historical pattern.

*Key Considerations:*

- *Correlation Coefficient*: A measure of the correlation between two assets, ranging from -1.0 to +1.0. A correlation of +0.80 or higher is typically required for a pairs trade.

- *Asset Selection*: Look for assets with a clear economic link, such as two stocks in the same industry or two ETFs tracking similar indices.

- *Risk Management*: Pairs trading can be used as a hedging strategy to reduce market risk. However, it requires careful monitoring and adjustment of positions ¹ ².

*Types of Trading Pairs:*

- *Cryptocurrency Pairs*: Examples include BTC/USDT, ETH/BTC, and ETH/USDT. These pairs are popular among traders due to their liquidity and volatility.

- *Stock Pairs*: Examples include pairs of stocks in the same industry, such as Carnival and Royal Caribbean cruises. Traders can use these pairs to bet on the relative performance of each stock ³ ⁴.

*Tools and Resources:*

- *PairTrade Finder*: A software that helps automate the process of finding and monitoring pairs trades. It provides a robust research pipeline and advanced statistical analysis.

- *QuantConnect*: A browser-based backtesting and algorithmic trading platform that allows traders to create and test pairs trading strategies.