#TradingPairs101

For investors using historical stock performance to place long and short bets for significant profits.

Pair trading was first used in the mid-1980s as a means to utilize technical and statistical analysis for potential profits. This field remained exclusive to Wall Street professionals until the internet made online trading and real-time financial information accessible to the public. Soon, seasoned amateur investors emerged using pair trading to make money while simultaneously managing their risks.

What is pair trading?

Pair trading is a day trading strategy where an investor takes a long position and a short position in two financial instruments that have shown a high historical correlation but have temporarily diverged.

The correlation between two financial instruments refers to how much they influence each other. More specifically, correlation is a statistical measure that evaluates the relationship between the historical performance of two financial instruments.

It is typically expressed as what is called the "correlation coefficient." This measure ranges from -1.0 to +1.0, where negative 1 indicates that their prices move in completely opposite directions. A positive correlation coefficient of 1 indicates that their prices move up and down simultaneously and under the same conditions.