What is pair trading and how it works?

The strategy of matching a long position with a short position in two stocks of the same sector. This creates a hedge against the sector and the overall market that the two stocks are in. The hedge created is essentially a bet that you are placing on the two stocks; the stock you are long in versus the stock you are short in.

In pair trading ,one typically trades 2 similar stocks (same sector. etc).We go long in one and short the other, depending on pairs deviation from their historical mean price.So we will be short in the stock which is outperforming and long in the underperforming one, expecting the pair to ultimately come back to its mean value.