In pairs trading, Is it necessary that both stocks are from the same sector??
Hi Vibhu,
It is not necessary for the pair of stocks to be from the same sector, but generally, stocks from the same sector are correlated, which means that they tend to move together. The chosen pair of stocks for a Pairs Trading strategy must be co-integrated in order to exhibit mean reversion. Pairs Trading is a market-neutral strategy, implying that the direction of the overall market does not affect the strategy's profit or loss. For these reasons, it is a good idea to pick stocks from the same industry or sector.
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