Markets go up, they go down, and they go sideways. Nobody likes to hold a stock only to see it decline along with a bear market or even a short term correction. It's a painful feeling that virtually everyone who has invested in the market has felt. For many investors, it is status-quo to provide your investment adviser or broker with funds and let them run with a stock or even an Exchange-Traded Fund (ETF). Despite the market performing well over the past few years, many investors still feel the pain of losing money in past corrections and are afraid to invest again and/or increase their allocation to the markets. "It's a big player's market" we all hear over and over again, referring to the professionals and larger institutions that many feel have the funds and clout to move markets in directions that favor them.
The reality is that the market is more open than you may think. While it will always be the case that money moves markets, it is also true that the methods used to trade the markets are open to all investors. One of the more popular methods that large firms use is called Pairs Trading. With Pairs Trading, firms can make money regardless of which direction the market moves by mitigating risk. This is why some hedge funds were able to fare well during the precipitous market declines in 2008. Pairs Trading, however, is not restricted to just Professional Firms although there often seems to be a false perception that such a restriction exists. It is an open methodology, fairly well studied and established, that can be used by anyone with access to the right tools.
It is important to know that Pairs Trading does not follow the market and that this has been confirmed and widely accepted. In other words, Pairs Trading success can be achieved under all market conditions. Some pairs traders use a Pairs Trading methodology exclusively while others use it as a less risky compliment to other techniques such as buying/selling individual stocks and options.
That said, is there risk in Pairs Trading? Sure, as there is risk in investing or trading in any market type and this is where a little bit of knowledge can go a long way. There are a few different approaches to Pairs Trading, and it is important to learn how it works and understand the approach that you want to take. For example, PT Professional's approach focuses on trading stock pairs with a short term time horizon (generally within 1 to 5 days) with well defined entry and exit points. These parameters we believe help to mitigate risk while in many cases allowing to maximize reward. Sounds great, but there is a trade off. The trade off is in your court - to best utilize a system like this requires some time and effort to manage your portfolio.
To summarize, Pairs Trading is an outstanding way to make money in the market under any condition - up, down or sideways - and it is available to all. It takes a little more understanding than just buying or selling an individual stock but it is not a difficult concept to learn and to understand well. There are a few different ways to Pairs Trade, and the better techniques do require some time and effort to manage your positions. If you have an interest in the markets, it is well worth your time to explore and understand this concept further.