#TradingPairs101

Understanding Trading Pairs Strategy

The trading pairs strategy involves taking simultaneous long and short positions in two highly correlated assets to establish a market-neutral stance. It’s commonly used in statistical arbitrage and aims to profit from relative price movements rather than overall market direction.

What Are Trading Pairs?

Trading pairs consist of two securities that historically move in tandem — typically with a strong positive correlation. The strategy capitalizes on mean reversion, the idea that price divergences between the two assets are temporary and will revert to their historical average over time.

By going long on the undervalued asset and short on the overvalued one, traders aim to capture the spread as it normalizes, regardless of whether the broader market is bullish or bearish.

This approach is often used by hedge funds and professional traders to minimize directional risk while exploiting inefficiencies between related assets.