What is pairs trading?

The pairs trade strategy uses statistical and technical analysis to seek out potential market-neutral profits. A pairs trade is a trading strategy that involves matching a long position with a short position in two stocks with a high correlation. Pairs trading was first introduced in the mid-1980s by a group of technical analyst researchers.

What are the limitations of pairs trading?

There are several limitations for pairs trading. One is that the pairs trade relies on a high statistical correlation between two securities. Most pairs trades will require a correlation of 0.80, which can be challenging to identify. Second, while historical trends can be accurate, past prices are not always indicative of future trends.

What makes a successful pair trade?

The essential part of a successful pair trading is relative performance. To have peace of mind, professional traders only target the relative performance of their first trade compared to the performance of its matched trade. The most critical part of any pair trade is how to identify the best trading currency pairs.

What are the Best Forex pairs to trade?

The best forex pairs to trade with this market neutral strategy are the ones with the highest correlation. Overall, the two trades matched should give us a neutral or risk-free position that allows traders to make a profit in the market. Why Does the Pair Trading Strategy Work?