Pairs Trading with CFDs

One of the most popular strategies for trading CFDs, particularly amongst larger investors, is pairs trading. Pairs trading is often used as a hedging strategy against losses, and relies on traders identifying correlative shares and instruments which tend to fluctuate in tandem - i.e. where one instrument rises, a corresponding instrument falls. For example, a rise in the base rate of interest might benefit mortgage lenders but adversely affect home builders, which could create a potential hedged pairing to mitigate losses and deliver a profit whatever the outcome.

Similarly, pairs trading can be used to multiply earnings on the upside, where a pair of instruments relative to the same sector both tend to move in the same direction. For example, where one telecoms company announces good trading results, so too do other companies in the telecoms industry benefit from a boost in underlying share price. This allows traders to double-up on certain market movements, ultimately amplifying the earnings against a single instrument trade.

Another example of pairs trading with CFDs is when investors identify potentially strong companies and go long on them, but to protect themselves from falling market or sector they go short on the whole index. Even if the markets rise they expect the shares of their chosen company to outpace the rise in the sector thus reducing the risk and exposure.