Pairs trading

Pairs trading involves buying and selling two related stocks when their prices diverge in the expectation they will move back together over time. All manner of investors from large endowments such as Harvard University to retail clients use the strategy because it is regarded as less risky than an outright purchase or sale. Implementation varies but the idea is the same - to buy the undervalued pair and sell the overvalued pair.

Examples abound however a good starting point is to chart two related stocks that you have an interest
in. This will show you how much they have diverged in the past and how quickly they came back
together. The ASX charting search page amongst others allows you to chart two stocks or a stock and an index, so the information is readily available.

Here are some popular pair examples as at Friday September 22, 2006.

BHP v. RIO

 

PBL v. SEV v. TEN

 

QAN v. VBA

 

CBA v. WBC