Statistical Arbitrage Quickstart
Learn the basics of Statistical Arbitrage trading.
When two linked assets temporarily diverge, we trade both at the same time:
How to
- Buy one asset (it's undervalued)
- Short the other (it's overvalued)
- Profit when they inevitably realign.
Why it works?
- We pre-select proven pairs with predictable behavior.
- You execute simultaneous trades (long + short).
- Profit when prices converge back to normal.
Example
Buy Coca-Cola shares while shorting Pepsi—capture the gap when they rebalance.
This strategy works by taking advantage of the temporary price divergence between two historically correlated assets, profiting when their prices converge back to normal.
Risk Management
Managing risk is not optional; it is an essential component of every successful trading strategy.
Every long position must have a matching short
By matching the long and short positions, the strategy becomes market-neutral, meaning it is less affected by broader market movements.
- Simultaneous trades
The entry position (long + short) must be taken at the same time. Both, the long and the short must be taken at the same time too.
- Same dollar amount
The long position and the short position must have equal nominal size to be market-neutral
- Careful with Commisions
Always ensure to use the platform with the lowest commision and tightest spreads you can find.
Next Steps
Here are some next steps to get started: