The article aims to help everyone understand how to conduct long-term and stable trading based on regular trading theory through orthodox quantitative analysis of trading strategies. I hope everyone can improve the success rate and stability of trading through scientific methods and rigorous analysis. In addition, please note: those who can make a profit of tens of percent every day, those who double their profits in a few days, those who ask about the return rate as soon as they open their mouths, please also take a detour, those who are unwilling to learn, your cognition determines your head and your pocket.

I. Pair Trading and Its Advantages

Pair trading, one of the best market-neutral trading strategies, was initially developed by Morgan Stanley quantitative analyst Nunzio Tartaglia in the mid-1980s, providing institutional traders with a competitive advantage. It resolves market volatility by buying and selling two highly correlated financial assets at the same time, regardless of market changes, it remains as stable as Mount Tai. This strategy is not limited by the overall market trend and can maintain stable returns under various market conditions.

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Stability and risk resistance: Pair trading resolves the uncertainty of market volatility by buying and selling two highly correlated financial assets at the same time. This strategy is not limited by the overall market trend and can maintain stable returns under various market conditions.

Suitable for beginners and individual traders: Due to its relatively low market risk and stable return characteristics, it is particularly suitable for newcomers who have just stepped into the trading world. Compared with those high-risk trading strategies, the rules and logic of pair trading are simple and clear, easy to grasp.

Global application: Whether it is Morgan Stanley, Goldman Sachs, or other top institutions, they all widely use pair trading strategies to ensure efficient and accurate trading execution.

II. The difference between pair trading and hedging trading

In trading, although pair trading and hedging trading have similarities, they each have their own characteristics.

Definition and purpose of hedging trading: Hedging trading is like an art of avoiding enemies in the world, by establishing opposite positions to offset the impact of market fluctuations on the investment portfolio. For example, an investor who holds a large number of stocks, if worried about the market falling, can establish an equivalent short contract to hedge the existing stock risk. The effect of hedging trading depends on accurate market predictions, and the volatility and complexity of the market make predictions extremely difficult.The Definition and Purpose of Pairs Trading: Pairs trading capitalizes on the price discrepancies between two strongly correlated assets to generate profits. It not only mitigates the risk of market volatility but also achieves stable returns by analyzing and leveraging the statistical advantages of price relationships. The key to pairs trading is to identify the correlation between price movements and to profit by buying and selling operations.

Summary of Differences:

Different Purposes: Hedging aims to reduce the risk of existing assets, while pairs trading uses price correlation to make profits.

Different Operational Logic: Hedging creates opposite positions to offset risks, while pairs trading utilizes the price differences by simultaneously buying and selling two correlated assets.

Different Risk Preferences: Hedging is suitable for investors who wish to protect the value of their existing investment portfolios, while pairs trading is suitable for traders seeking stable returns and precise arbitrage. Through the above comparison, we can clearly understand the differences between hedging and pairs trading, which will help newcomers to better understand and choose trading strategies that suit them.

III. The Scientific Basis and Application of Pairs Trading: Pairs trading has a rigorous scientific basis and model support behind it.

Data Analysis and Cointegration Models: The core of pairs trading lies in identifying the long-term equilibrium relationship between two assets. This relationship is determined by the cointegration model. The cointegration model can discover that although the prices of two assets fluctuate significantly in the short term, they maintain a stable price difference in the long term, providing valuable arbitrage opportunities for traders.

Covariance and Correlation Coefficient: Covariance and the correlation coefficient measure the relationship between the price changes of two assets. A high correlation coefficient indicates that the price trends of two assets are similar, making them suitable candidates for pairs trading.Statistical Arbitrage Models: Statistical Arbitrage Models are based on the statistical analysis of price behavior to identify asset pairs with arbitrage opportunities. These models use historical data for backtesting to determine the effectiveness and potential returns of the strategy. The accuracy and reliability of the models directly affect the success rate of the trading strategy, ensuring that traders remain invincible in the volatile market.

The importance of these statistical models in pair trading cannot be overlooked. They provide a solid theoretical foundation for trading strategies, improving the success rate of trades through precise data analysis and simulation, helping quantitative traders dynamically adjust their strategies to cope with market changes, and ensuring the effectiveness and profitability of trades.

IV. Possibilities of Pair Trading in the Foreign Exchange Market and Quantitative Program Design Ideas: In the time to come, we will periodically delve into the correlation of various currency pairs in the foreign exchange market, providing and discussing how to use advanced quantitative program design to effectively implement pair trading strategies.

By collecting detailed data, establishing models, and executing actual trades, we explore the endless possibilities of Pairs Trading together.

In summary, pair trading is a strategy that uses price differences between assets for arbitrage, with the advantages of stable returns and low risk, making it very suitable for beginners. Through scientific statistical models and data analysis, traders can accurately select the right asset pairs for trading to achieve long-term stable returns.

I hope that through this series of articles, everyone can learn the essence of pair trading and use regular trading theories for long-term stable investment.