Statistical arbitrage or StatArb is in some way similar to pairs trading that takes offsetting positions in co-linearly related products that we explored in Chapter 4, Classical Trading Strategies Driven by Human Intuition. However, the difference here is that StatArb trading strategies often have baskets or portfolios of hundreds of trading instrument, whether they are futures instruments, equities, options, or even currencies. Also, StatArb strategies have a mixture of mean reversion and trend-following strategies. One possibility is that price deviation in the instrument being traded is less than the expected price deviation based on the expected relationship with the price deviations for the portfolio of instruments. In that case, StatArb strategies resemble a trend-following strategy by positioning themselves on the expectation that the trading instrument's price will catch up to the portfolio.

The other case is that price deviation in the instrument being traded is more than the expected price deviation based on the expected relationship with the price deviations for the portfolio of instruments. Here, StatArb strategies resemble a mean reversion strategy by positioning themselves on the expectation that the trading instrument's price will revert back to the portfolio. Most widespread applications of StatArb trading strategies lean more toward mean reversion strategies. StatArb strategies can be considered HFT but can also be medium frequency if the strategy positions last longer than a few milliseconds or a few seconds.