Pairs Trading

Pairs trading is a strategy where an investor identifies two related stocks that typically move together. When the price of one stock deviates from the other—say, it becomes undervalued—the investor buys the cheaper one and sells the more expensive one. The idea is that, over time, prices will realign, allowing the trader to profit from the convergence. It’s a market-neutral approach, meaning it aims to profit regardless of overall market direction, relying on the relative performance of the two stocks rather than the broader market movement.