Ann: Exploration Update, page-22

Pairs trading aka market neutral trading strategy sounds good on face value and a lot have promoted it as little loss making strategy but is further from the truth from my experience.

Effectively you are saying that in 2 very related stocks ex. RIO/BHP, NST/EVN; one counterpart can experience short term weakness relative to the other and you try to exploit this weakness. The ST divergence in performance allows you to buy the weaker and short the stronger at the same time. If the status quo maintain over time, the divergence in performance should snap back in line and you profit this way.

Another way is to play that divergence continuing so you buy the stronger and short the weaker.

The problem is beside eye balling the 2 chart together, you need to find a way to measure the daily divergence/convergence and display that on a chart. Not many data providers out there provide this type of data.

Another way is to hedge it with a counter short on the stock assuming you are skillful in picking potential tops whether it be a short term or the ultimate one. On the top 20 and don't quote me, some also use options to hedge which is the most logical but cost is a big consideration on any of the methods.

I think this is what @mainholm meant if I understand it correctly.