Cointegration-Based Strategies in Forex Pairs Trading

Abstract

Pair trading, a popular strategy in financial markets, leverages pricing differentials among correlated assets. Cointegration, a key concept, identifies long-term equilibrium relationships among non-stationary time series data, offering trading opportunities when deviations occur. This paper reviews pair trading methodologies, focusing on the Cointegration approach's robustness. We propose applying cointegration-based pair trading to Forex markets, aiming to enhance reliability and objectivity in trading. Through parameter optimization, our study identifies profitable strategies, contributing to algorithmic frameworks in financial markets and empowering traders to mitigate emotional biases while maximizing profitability.

JEL Classification: C45, G11, C53, G17