A previous post has outlined the opportunities available through pairs trading.  Pairs trading allows you to profit from relative price movements between correlated securities as they become decorrelated, and then reconverge.  You purchase one security whilst short selling the other (note: there are restrictions on short selling stocks).  This is a market neutral strategy – it doesn’t matter what the market does as a whole – money is made by the convergence.

The difficulty to date has been the enormous computational effort of calculating correlations and then looking for divergences, but by chance, I found a product that already provides this information (I am not associated with it in any way).  The rest of this article outlines where you can get this, and a quick guide to using this data for profit.

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Whilst hedge funds have recently got some bad press due to the collapse of some funds that hold illiquid securities, wealthy investors still reap huge annual profits from the many sound hedge funds.  This article is about a hedge fund trading technique called pairs trading, or statistical arbitrage, and how you can use it to profit in your own trading.

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