Pairs Trading

Posted on 08th July 2019
Pairs Trading

INTRODUCTION

In trading, traders always wish to make profits with ease. Pairs trading is where the trades can be made with less loss. Accurate historical modeling and the proper interpretation of results can help to identify positively correlated pairs. Pairs identification and fundamental research give you the best benefit in pairs trading.

PAIRS

Pairs represent the pair of currencies which is paired for trading, the bid price, and the sell price. For example, if it is currency pairs, EUR/USD; USD/JPY. If it is other than currencies, the pairs can be of anything like WMT/TGT(WALMART/ TARGET CORPORATION). There are many other currency pairs used in trading. The currency format can be changed according to the change in economic values.

PROFITABLE TRADE

The market researchers have a name, Quants. It is running by the coordination held between the companies and the trading vehicle to acquire a successful trade. Quantitative analysis is used by the market researchers to earn a profitable trading strategy.

With the help of the pairs trading strategy, Morgan Stanley, a multinational investment bank and financial service company, once struck gold. As a result, Institutional investors and proprietary trading desks have been using pairs trading to achieve profits. Many used the same strategy and acquired profitable trading

Bankers and fund managers usually don't outlet their trading strategies to the public. Since they did not let it out, the strategy remained a secret. However, people receive help from the online trading tool, so it was easy for them to resolve their queries and had access to popular investment strategies.

Fundamental and technical data can be used by the traders to construct a pairs trading style. It works not only on stocks but also on currencies and commodities. In the forex futures trading, the markets allow smaller investors to trade in futures.

The reason why the traders can be profitable in all market conditions is that the pairs trade is not about the market condition, it depends on the relationship of two instruments. When you capture positively correlated pairs, there comes a profitable trade. Bearish and bullish don't matter to pairs trade because the market depends only on the correlation.

Few scholars depicted and proved that the pairs trading is one of the profitable trades. They proved this in 1998 and concluded that in six months, they got 12% returns in pairs trade. The trade will only be unprofitable if the two prices drift apart.

There are few advantages for the traders while trading in pairs trade.

  • Controlled risks,
  • Profit in any market direction.    
  • Meanwhile, the risk is in the disadvantages.

CONCLUSION

Pairs trading embodies simplicity. Beginners can benefit more from pairs trading since it is manageable at any market condition. Meanwhile, profit and loss are both parallel lines in trading. A trader has to face the loss occasionally in order to make periodic profits. Rather than being worried, inspect the loss as a tool to win the forthcoming trades by jotting down the methods that fail to produce profits. Changing a negative situation to a favorable one is an attitude that every trader must master.

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