Can someone explain what pair trading is?

Hmm, I'm of a different opinion here. You see, this method does have its perks, but in my experience, the juice isn't really worth the squeeze.

Firstly, all the hunting around for perfectly correlated pairs - it's not as easy as it seems, let's be honest. Unpredictable market dynamics, unexpected news, there's a lot of things that can break the correlation.

And even if you do find 'the perfect pair', and manage to set everything up nicely, what do you do when the inevitable divergence happens? Not to mention, how long do you wait for the pair to converge again?

Also, the profits margins aren't exactly earth-shattering are they? You're playing off very tiny differences and relying on the sheer volume of transactions. So unless you're operating on a rather large scale, squeezing a decent profit is tricky.

Don't you think the effort-to-return ratio isn't all that great here? Am I missing something, or am I looking at it from a wrong perspective?

Fair enough, I can see why some might find pair trading appealing. It does add a level of sophistication to one's portfolio. But here's an angle some might have overlooked. Yes, you're betting on the divergence, but what about opportunity cost? The money you're tying up in this pair trading could be deployed elsewhere for potentially higher returns, don't you think? Now, I'm not saying pair trading is bad, I just think it's not for everyone.

You also mentioned something about it lowering risk. I believe results may vary. Yes, on the surface, it does seem to lower risk. However, isn't there a hidden risk? The risk of the pair not converging again or within the timeframe that one expects? That could potentially end up as a loss, right? I guess what I'm trying to say is, isn't it possible we might be underestimating the complexities and risks involved? I don't know, maybe someone else has some insights on this. What's your take guys?

Completely see where you guys are coming from, but isn't there also a chance of missing out on other more profitable opportunities due to the capital tied up in pair trading? And isn't each pair's behavior a bit too independent from the market to really predict? Just food for thought!

Indeed, monitoring costs and slippage are also important considerations when dealing with pair trading. These hidden aspects can chip away at potential profits.

Absolutely, and you know, there's another dimension to this. It takes a considerable amount of time and effort to really get skilled at pair trading. It's not just about understanding the initial concept but also about continuous learning and adapting to the market's fluctuations. For some, the time invested might not be justifiable with the returns they're seeing, especially considering the high amount of effort required for research and monitoring pairs on an ongoing basis.

Tapping into the psychological aspect, pair trading brings a unique emotional component to the table. Unlike straightforward buy-and-hold strategies, pair trading can test one's patience and emotional resilience. When a trade doesn't move as anticipated, it can be mentally taxing, especially considering that proper pair trading strategies typically require a rather dispassionate approach to market movements. The stress of watching two positions move in unexpected directions can lead to second-guessing one's decisions, which might throw a well-planned strategy off course.