#TradingPairs101

For investors using the historical performance of stocks to place long and short bets for significant profits.

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

What is pair trading?

Pair trading is a daily 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 deviated from synchronization.

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

It is usually expressed in what is known as 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 at the same time and under the same conditions.