Pairs Trade

AAA

DEFINITION of 'Pairs Trade'

The strategy of matching a long position with a short position in two stocks of the same sector. This creates a hedge against the sector and the overall market that the two stocks are in. The hedge created is essentially a bet that you are placing on the two stocks; the stock you are long in versus the stock you are short in.

INVESTOPEDIA EXPLAINS 'Pairs Trade'

It's the ultimate strategy for stock pickers, because stock picking is all that counts. What the actual market does won't matter (much). If the market or the sector moves in one direction or the other, the gain on the long stock is offset by a loss on the short.

RELATED TERMS
  1. Hedge Accounting

    A method of accounting where entries for the ownership of a security ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  4. Pairing Off

    An illegal practice of a brokerage firm offsetting short and ...
  5. Paired Shares

    The stock of two separate companies that are under the management ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly ...
Related Articles
  1. Mutual Funds & ETFs

    An Introduction To Pairs Trading With ETFs

    This strategy can help investors reduce portfolio volatility and make money in uncertain markets.
  2. Options & Futures

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  3. Options & Futures

    The Secret To Finding Profit In Pairs Trading

    Read about a market-neutral trading strategy using relatively low-risk positions.
  4. Investing

    What is relative strength?

    Relative strength is a measure of the price trend of a stock or other financial instrument compared to another stock, instrument or industry. It is calculated by taking the price of one asset ...
  5. What's a Marketable Security?
    Active Trading

    What's a Marketable Security?

    Marketable securities are financial instruments that can be readily bought and sold in a public market. The key feature is the ease with which it can be sold and converted into cash. Usually, ...
  6. Trading Strategies

    How are Marubozo patterns interpreted by analysts and traders?

    Dig deeper into the Marubozo candlestick pattern, when the daily trading of a security never exits the range between opening and closing prices.
  7. Stock Analysis

    Buyinb Facebook Stock, A Beginner's Guide

    This straightforward guide helps the novice investor feel more adept at buying a stock, such as Facebook (FB).
  8. Trading Strategies

    What are the most common momentum oscillators used in day trading?

    Take a look at some commonly used momentum oscillators that can also be used for intraday trading, such as stochastic oscillators or the Ultimate Oscillator.
  9. Forex Strategies

    How to Build A Forex Trading Model

    Forex trading markets work 24/7, providing ample opportunities to make profitable trades. How can you build a profitable forex trading model for yourself?
  10. Trading Strategies

    What is a common strategy traders implement when using the Exponential Moving Average - EMA?

    Learn a common strategy traders use in conjunction with the Exponential Moving Average indicator known as the moving average bounce.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center