Alexander M953 Brown#45

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What is cointegration in forex pairs trading?

Cointegration is a statistical concept where two or more time series move together in the long run, even if they diverge in the short term. In forex, cointegration-based pairs trading identifies currencies with strong economic ties, such as EUR and CHF. If EUR/CHF deviates significantly from its historical equilibrium, traders may bet on convergence by going long the undervalued and short the overvalued pair. Cointegration provides stronger signals than simple correlation because it accounts for equilibrium relationships. However, structural breaks (like central bank interventions) can destroy cointegration, causing losses. Institutions apply cointegration with robust tests and safeguards, while retail traders can use it as a statistical edge. It is a powerful approach when applied cautiously.