The concept of pairs trading, or relationship-based trading, comes from Morgan Stanley, where a group of researchers first developed the strategy in the 1980s. Simply put, pairs trading requires you to match a long position against a short position on a pair of stocks that are highly cointegrated.  There may also be high correlation as they track together through market fluctuations. Once you find the some great pairs to trade, it can be a very effective trading strategy, insulating you from the market gaps, reversals and overall volatility, but tracking, executing and managing the combinations takes knowledge, time, skill, historical and current data.

Benefits of pair trading

Relationship-based trading helps to identify probability and predictability.  Volatility increases your chances to take trades over and over again increasing production on a pair or portfolio of pairs.  You may be able to identify the leading stock and the stock that lags.  This will assist...