Definitions

Pairs Trading

Posted By: TradersLog

Pairs trading is a strategy that uses two highly correlated financial instruments (eg Coca-Cola and Pepsi) whose price relationship has divergerged outside of the historical range. In buying one and selling the other, the strategy aims to profit from the price reverting back to as the mean trend as the spread between the two converges.

Related Reading: Trading Pairs: Capturing Profits and Hedging Risk with Statistical Arbitrage Strategies by Mark Whistler (2004)

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