Pair trading

Since the 1980s, one of the most well-known and heavily used strategies among hedge funds and portfolio managers has been pairs trading. The pair trading is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. 

In a properly hedged pair, an investor goes long on one stock and short on the other. Thus, when the market goes up, the long position follows suit and profits, while the short loses money (and vice versa when the market falls). The relationship between the two stocks (known as a spread) will influence whether the overall position prospers or not.

Pairs trading have the potential to achieve profits through simple and relatively low-risk positions. The pair trade is market-neutral, meaning the direction of the overall market does not affect its win or loss

To profit from this strategy, you have to choose good pairs in the same industry with similar business models and a consistent, historical relationship. Pairs trading strategy demands good position sizing, market timing, and decision making skill. Although the strategy does not have much downside risk, there is a scarcity of opportunities, and, for profiting, the trader must be one of the first to capitalize on the opportunity.

A profit or loss on a pair trade depends on whether the spread between paired positions widens or narrows.

Example for Pair trading:


Please take a look at Jindalstel and Tatasteel stocks. Both the stocks are in same sector.
3 month back (13.11.2014) rate:
 Short 200 shares of Tatasteel at 471.25
Bought 400 shares of  Jindalsteel at 152.3
Today price(16.02.2015):
Short 200 shares Tatasteel at 471.25      -373.5 
Profit -471.25-373.5=98.05*200=Rs 19610
Bought 400 shares Jindalsteel at 152.3    -153.2
Profit-153.2-152.3=1*400=Rs 400.

Still you have any doubt about pair trading please visit below link.

http://www.tradingmarkets.com/featured_contributors/how-to-successfully-pair-trade-1584315.html

http://techpaisa.com/2011/sep/26/pairs-trading-strategy/