Pair trading (spread trading) is the simultaneous buying and selling of two financial instruments which relate to each other. The difference of the price changes of these two instruments makes the trading profit or loss. Spread trading can be of two types:
- Intra-market: traders can open long and short positions on the same underlying asset
- Inter-commodity spreads: Traders can open long and short positions on different market assets which are related to each other, like gold and silver.