Pairs trading: profit whichever way the market goes

Pairs trading sounds daunting. But it really isn't. By picking two highly-correlated assets, you reduce your market risk. Theo Casey explains.

Market-neutral, or pairs trading, sounds daunting. But it really isn't. All you do is buy a stock, index, currency or commodity that you think is undervalued, and then sell short a related asset you believe is overvalued.

The trick is to pick two assets that are highly correlated. That is, assets that tend to bounce around in a similar range and respond to the same catalysts. That way the relationship won't get too heavily skewed one way or the other.

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Theo Casey

Theo is a former financial writer and editor, having written for reputable titles such as Euromoney Institutional Investor and Redwood Publishing. He has also appeared on-screen with Al Jazeera, BBC and CNBC and on MoneyWeek Theo covered funds, share tips and stockmarkets. He also edited the country's oldest newsletter with Lord Rees-Mogg for four years. Theo now runs his own content marketing agency for financial companies, and he is a seasoned CISI-qualified investment adviser.