What is Stock Pair Trading?
is an outstanding strategy of professional traders and hedge funds
capitalizing on short-time market inefficiencies.
The strategy is based on the fact that the ratio of prices of two suitably chosen (correlating) shares is long-term stable and oscillates around the average value.
If the ratio comes outside the normal area, you can speculate with high success rate that the ratio will return to the mean value and you can collect a profit
Profiting from stock pairs
The success of pairs trading depends heavily on the modeling and forecasting the ratio of stock prices in the pair. Using StockPairTrading platform you identify uncommon fluctuation of price ratio which has potential to generate profit - get signal to enter position. Stock pair position is than formed by entering long in undervalued stock and short in overvalued stock. When the price ration comes back to mean value, you take your profit and close the trade. Typical stock pair trade takes 5-10 days.
This strategy enables traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement.
Performance and risk management
The pairs trade helps to hedge sector- and market-risk. For example, if the whole market crashes, and the two stocks plummet along with it, the trade should result in a gain on the short position and a negating loss on the long position, leaving the profit close to zero in spite of the large move.
Trading several (tens, hundreds) stock pairs diversify the portfolio and increase overall stability.
Thanks to limited risk and diversified portfolio, strategy delivers stable profits many years.
Finally profitable strategy for my trading. Easy to understand and execute. I wish I know pair trading 5 years ago... :-(
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