Many traders and investors feel you have to pick the direction right on a stock to make money trading. Certainly, there is some truth to that. Astute traders, however, know that dampening directional bias and focusing on comparative relative performance can also be a very profitable and lower risk way to position to profit.
Looking at two stocks that normally trade in a similar manner, called correlated, but are beginning to trade differently, or diverge, can set up for a pairs trade of going short the relative out-performer and going long the relative under-performer. The profit is then realized when these two stocks move back, or mean-revert, to the more traditional relationship.
