#TradingPairs101 TradingPairs101: An Overview
TradingPairs101 is an educational platform designed to teach users about the world of pair trading. This type of trading strategy is a market-neutral form of trading that seeks to benefit from the temporal divergence in the price of two historically correlated assets.
Here are the key points that a summary of TradingPairs101 would likely cover:
* What is Pair Trading? Explains the fundamental concept: identifying two assets (stocks, cryptocurrencies, commodities, etc.) that move in a predictable relationship. When the relationship diverges (one rises significantly while the other falls, or one lags behind), the trader takes a long position in the "undervalued" asset and a short position in the "overvalued" asset, hoping that the relationship returns to its historical average.
* Advantages:
* Market Neutrality: The main advantage. Since trading occurs on both sides of the market (long and short), the trader is less exposed to the overall market movements (bullish or bearish). Profits are made from the correction of the relationship between the pairs, not from the direction of the market in general.
* Lower Volatility: Being hedged, the strategy can be less volatile than directional trading.
* Potential for Profit in Different Conditions: It can be profitable in both bullish and bearish markets.
* Disadvantages and Risks:
* Decorrelation: The main threat. If the pairs that were thought to be correlated become permanently decorrelated, the strategy may incur significant losses.
* Transaction Costs: Pair trading often involves multiple transactions (buying and selling simultaneously), which can accumulate fees and commissions.
* Difficulty of Identification: Finding truly correlated pairs that maintain that correlation over time requires research and analysis.
