In the world of trading, "trading pairs" or "pair trading" (also known as "statistical arbitrage" or "pair trading") refers to an investment strategy that identifies and exploits the differences in the behavior of two highly correlated financial assets. It is based on the idea that, although the prices of two assets may diverge temporarily, they will eventually revert to their historical relationship.
Main concept:
Pair trading focuses on:
Identifying two assets with high correlation: Assets that tend to move together in the market.
Detecting price divergences: When the relationship between the prices of the two assets deviates from their historical average.
Exploiting convergence: When the prices of the assets come closer again to their historical relationship, closing positions to realize profits.
How it works:
The pair trading strategy involves:
Simultaneous positions:
A long position is opened in one asset and a short position in the other related asset.
Correlation analysis:
Statistical analysis is used to determine the historical relationship between the prices of the assets.
Divergence detection:
It is identified when the differential between the prices of the assets deviates significantly from their historical average.
Short and long trading:
Trading is done with the asset whose price is lower in a long position and with the asset whose price is higher in a short position.
Closing positions:
Both positions are closed when the prices of the assets converge again and a reversion to the mean is expected.
