Author Archives: Pairtrade Finder®

Pair trading is a form of market neutral investing were the risks that you take are based on the performance of one stock relative to another. The benefits of this type of trading technique is that the returns you receive are uncorrelated to the performance of the broader markets, which means that you can generate robust results in all types of market environments.

Hedge funds are very active pair traders, and whether they call their strategy long/short or statistical arbitrage, what they are doing is purchasing one stock and simultaneously selling short another stock. 

Investopedia defines “correlation” as a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management. Correlation is computed into what is known as the correlation coefficient, which has value that must fall between -1 and 1.

A perfect positive correlation means that the correlation coefficient is exactly 1. This implies that as one security moves, either up or down, the other security moves in lockstep, in the same direction. A perfect negative correlation means that two assets move in opposite directions,