The strategy of pair trading is essentially a market neutral strategy which allows the investor to derive profit from a situation where there is narrowing of a disparity pertaining to two similar companies in the stock market. In essence, CFD Pair trading is a relative value investment strategy involving two similar companies whose stock prices are at present out of their historical trading range. In this arbitrage system the two individual stocks of the two companies are normally seen moving in unison but now in the present one of these shares is either leading the other or is falling behind the other one, i.e, one share is overvalued while the other is undervalued. This drift causes a subsequent change in the underlying ratio. Now by making use of the pair trading strategy and investor would subsequently purchase a long CFD on the undervalued company and a short CFD on the overvalued one. On correction in the market prices of the shares of these two companies a CFD trader would stand profited on both his bets. Pair trading works out to be a neutral strategy with reasonably low risk associated with it. Also it remains largely unaffected by the change in directions of the overall market conditions.

To ensure that the trader carries out effective pair trading he must buy equal value of shares of both the companies. A ratio is used to calculate the degree of profit or loss incurred by indulging in pair trading. If the value of this ratio is on the higher side once the CFD is closed then the investor ends up earning a profit while on the other hand if the value of the ratio has decreased then it is loss which comes into the kitty of the investor.

Before deciding on to finally start with CFD pair trading it is essential to make one aware on certain conditions relating to this concept.

• To start off one must ensure with the CFD trader that the pairs available in the market are appropriate and befitting pair trading or not.
• It is of prudent importance to ensure that the trades pertaining the two shares are matched effectively in terms of their money value.
• The two shares chosen should be sufficiently similar so as to make a compatible pair to carry out CFD pair trading.
• It is very important for the investor to work out completely the total costs involved in the process right in the beginning before he starts the process of CFD pair trading.
• Also one must take into account all the risks which can be involved with CFD pair trading.

From the above discussion it is comparatively clear that in order to carryout successful pair trading using CFD’s the investor needs to have a keen and a sharp eye to spot the anomalies in the market and then subsequently act quickly so as to reap maximum benefits out of it. To identify these opportunities one needs to have experience and enough understanding of the market fundamentals. Also needed in place is a solid plan to spot these opportunities and to act fast on them. Unexpected situations like a sudden takeover, profit downgrades or any other such market sentiment has the potential of having an adverse impact on one of the two shares involved in pair trading by you. it is therefore important to have in place a stop loss which could help absorb the damage.