Pairs Trade


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.


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.

  1. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  2. Hedge Accounting

    A method of accounting where entries for the ownership of a security ...
  3. Pairing Off

    An illegal practice of a brokerage firm offsetting short and ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly ...
  5. Paired Shares

    The stock of two separate companies that are under the management ...
  6. Long (or Long Position)

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

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  5. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  6. Bonds & Fixed Income

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  7. Professionals

    Top 3 Misconceptions About Financial Analysts

    Learn misconceptions about financial analysts, such as they exclusively study the stock market, they are the same as financial advisors and they are all rich.
  8. Investing Basics

    What is Equity?

    Think of equity as ownership in any asset after all debts stemming from that asset are paid.
  9. Investing Basics

    Quit Your Job To Trade Stocks

    Changes in technology have turned trading into a career field that’s easy to enter. But staying in it is a different story.
  10. Investing Basics

    The Dangers Of Share Dilution

    Share dilution reduces the value of an individual investment and can drastically impact a portfolio.
  1. 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 ... Read Full Answer >>
  2. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  3. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  4. How does the stock market react to changes in the Federal Funds Rate?

    The stock market reacts to changes in the federal funds rate in various ways depending on where it is in the business cycle. ... Read Full Answer >>
  5. How do I place an order to buy or sell shares?

    It is easy to get started buying and selling stocks, especially with the advancements in online trading since the turn of ... Read Full Answer >>
  6. Is there a difference between financial spread betting and arbitrage?

    Financial spread betting is a type of speculation that involves a highly leveraged derivative product, whereas arbitrage ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center