Discussing the article: "Pair trading"
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Check out the new article: Pair trading.
In this article, we will consider pair trading, namely what its principles are and if there are any prospects for its practical application. We will also try to create a pair trading strategy.
Pair trading is a variery of statistical arbitrage first proposed by Jerry Bamberger in the 1980s. This trading strategy is market neutral, allowing traders to profit in almost any market condition. Pair trading is based on the assumption that the characteristics of interrelated financial instruments will return to their historical averages after a temporary deviation. Thus, pair trading comes down to a few simple operations:
Despite its apparent simplicity, pair trading is not an easy or risk-free way to make a profit. The market is constantly changing and statistical relationships may change as well. Besides, any unlikely price movement could result in significant losses. Dealing with such adverse situations requires strict adherence to the trading strategy and risk management rules.
For trading, the most interesting currency pairs are those with negative correlation. For example, this is what the movement of EURUSD and USDCHF looks like.
Author: Aleksej Poljakov