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What is statistical arbitrage in forex trading?

Statistical arbitrage (stat arb) uses quantitative models to identify pricing anomalies between correlated assets or pairs. In forex, traders might long EUR/USD and short GBP/USD when models suggest EUR is undervalued relative to GBP, expecting mean reversion. Institutions deploy machine learning and regression models to refine these trades, executing across multiple venues. Benefits: market-neutral positioning, reduced exposure to directional risk. Risks: correlation breakdowns, model overfitting, and hidden tail risk during crises. Retail traders can attempt simplified stat arb by monitoring historical spreads (like EUR/GBP vs. fundamentals). Statistical arbitrage teaches traders that profits can come from probabilities and patterns, not just directional forecasts.