As the cryptoasset market has evolved into a popular asset class for professional traders, there are now more and more advanced trading strategies that are being applied in the crypto markets.
In this guide, readers will be introduced to pair trading and how they can use this market-neutral strategy to generate a trading profit in the cryptocurrency markets.
What Is Pair Trading?
Pair trading is a market-neutral trading strategy that involves buying and selling two highly-correlated financial assets – such as two ETFs, stocks, commodities or cryptocurrencies – to generate a profit when the long position increases in value more than the short position drops in value.
Pair trading is a market-neutral or non-directional trading strategy, which means that trading profits can be generated regardless of whether the market is rallying or correcting.
Pair trading is, therefore, an excellent trading strategy for the highly-volatile cryptoasset markets where the market can easily drop by 50 percent in a matter of months.
Examples of Crypto Pair Trades
For a pair trading strategy to work, it is essential to choose pairs that have a high correlation with one another.
In the cryptoasset markets, one can find different types of digital currencies and tokens with very similar features that act as comparables. For example, traders can find digital currencies, privacy coins, gaming tokens, smart contract platform tokens, and exchange coins, among others. This enables crypto traders to deploy pair trading strategies.
Since not all cryptocurrency exchanges allow investors to short cryptoassets, it may be better to opt for CFD brokers that support cryptocurrencies to deploy this strategy as a retail investor or sign up to crypto futures trading platforms.