#TradingPairs101 Trading pairs" refers to an investment strategy that exploits historical correlations between two similar assets, with the aim of profiting from the divergence of these correlations. It is a trading technique that uses asset price data to identify investment opportunities.

How pair trading works:

1. Identify correlated asset pairs:

The strategy begins by identifying two assets that have a strong and positive historical correlation. These assets can be, for example, different types of stocks, currencies, or commodities.

2. Monitor the divergence of correlation:

Traders who use pair trading closely monitor the correlation between the two assets, looking for signs of divergence. If the original correlation is broken, the strategy may be used to try to profit.

3. Trade based on divergence:

When divergence is identified, the trader can trade the two assets in a way that benefits from the increase or decrease of the difference between their prices.

Benefits of pair trading:

Low-risk strategy:

Pair trading can be a lower-risk strategy than other trading strategies, as profits can be limited to the difference between the prices of the two assets, and losses can also be limited.

Potential for profitability:

If the strategy is successful, it may be possible to profit from the price difference between the two assets, especially if the correlation is strong.

Reduces market risk:

A pair trading strategy can reduce the risk associated with the overall market movement, as profitability is more related to the correlation between the two assets than to the individual market performance.

Challenges of pair trading:

Understanding correlation:

Understanding the correlation between the assets is essential for the success of the strategy, and it can be challenging to determine the correlation.