What is pair trading? Please clarify!

Please let me know if i'm in the wrong thread with this question.

What is it called when you are trading two pairs against each other e.g EURUSD/USDCHF(they are negative correlated and goes either away from each other getting close to each other) and you're not interested in how much or how little they are going away from each other, all you care about is when the cross each other?

You have the right thread because you started it.
Question: what is gives you when the pairs cross just to have a hint what you mean?

Hi,

Pair trading is a market-neutral strategy that first identifies two stocks which prices have moved together in past. When the spread between the stocks widen for any reasons, buy the underperforming stock and short the outperforming one. When the spread eventually converge and the trader will close the positions and profit.

Lubo.

http://en.wikipedia.org/wiki/Pairs_trade.

I hear this approach for the first time and cannot get it.
When one pair is shifted, then it is shifted due to increased spread that was taken from the trader. This is the way that I see it and I do not see any profit from this.

With spread it means the distance between the price of 2 securities, and then when distance from this 2 widen, they almost move together in the past, u can profit shorting the one that is went higher and buying the one that went lower....

Lubo.

In other words it is called hedging.

Yes if u make it between a Stock and its Derivates.

Lubo.

Thanks LuboLabo,

for the link and explaniation.

As i understand, if trade with EURUSD/USDCHF and if in the first USD goes down, in the second USD should decrease.

Pair Trading involves the buying and simultaneous selling of two instruments that are closely correlated, when that correlation is at an extreem. Traditionally used between equities, that have closely linked fundementals. ie Dupont v ICI .. or commodities , like Gold (XAU/GLD) and silver XAG/SLV.
The instrument at the correlation high is sold and the instrument at the correlation low is bought, with the expectation that they will mean revert to the original/historical correlation mean.

See an live example HERE..
http://www.forexfactory.com/showthread.php?t=145142
.. using WTI (West Texas Intermediate Crude) v OIL (Brent Crude) using the ODL MT4 platform which quotes both, based in NYMEX and ICE futures.

Hope this of help.