Market expert Shubham Agarwal has outlined pair trading as a strategic approach for navigating volatile market conditions, particularly when traditional directional bets become increasingly risky. With Nifty experiencing significant turbulence in January 2026, falling from lifetime highs to current levels around 25,200, traders are seeking alternative strategies to manage uncertainty.

Market Volatility Context

The current market environment reflects the challenges facing traders in early 2026. January began with optimistic sentiment as Nifty flirted with lifetime highs, with traders discussing potential levels of 27,000 and even 29,000. However, the scenario changed dramatically due to multiple factors impacting market sentiment.

Understanding Pair Trading Strategy

Pair trading represents a market-neutral strategy that involves simultaneously buying one stock future while selling another stock future. This approach addresses the fundamental challenge traders face when they identify attractive opportunities but remain concerned about broader market or sector-wide risks.

The strategy specifically targets two types of market risks:

• Systematic Risk: Affects entire sectors or markets through policy shifts, rate changes, or global events
• Unsystematic Risk: Company-specific factors including poor results or operational failures

Implementation Framework

Agarwal outlines a structured approach for executing pair trades effectively. The process begins with identifying a preferred stock based on budget expectations and derivatives data, followed by selecting an appropriate pairing candidate from the same sector.

Selection Criteria for Pair Trading

Risk Management Benefits

The pair trading approach offers significant advantages during periods of heightened volatility. When sector-wide negative news impacts the market, both positions in the pair typically move in the same direction, with losses on the long position offset by gains on the short position. This neutralizes systematic risk while allowing traders to benefit from relative performance differences between the two stocks.

Agarwal emphasizes that while pair trading may result in lower absolute profits compared to successful directional bets, it provides superior risk control. The strategy proves particularly valuable during volatile markets, near market highs, or before significant events such as budget announcements.

Strategic Considerations

The expert acknowledges that many traders initially dismiss pair trading due to lower absolute profit potential. However, he stresses the importance of considering risk-adjusted returns rather than focusing solely on maximum profit scenarios. The approach prioritizes consistent performance over potentially higher but riskier returns, making it suitable for current market conditions where directional trading has become increasingly challenging.