Definition
Pairs trading involves going long one security and short another that are historically correlated. When the spread between them diverges from normal, the trader bets on convergence. It's market-neutral because gains don't depend on market direction, only on the relationship between the two securities normalizing.
Example
Coca-Cola and Pepsi usually move together. When Pepsi underperforms by 5%, go long Pepsi, short Coca-Cola, betting on convergence.
FAQ
What is Pairs Trading?
A market-neutral strategy trading two correlated securities.
Why is Pairs Trading important?
Pairs Trading helps investors evaluate trading strategies and make more informed decisions.