Pairs trading strategy - The Secret to Cashing Profits

Описание: Pairs trading strategy - The Secret to Cashing Profits
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What Is a Pairs Trade?
A pairs trade is a trading strategy that involves matching a long position with a short position in two stocks with a high correlation.

Understanding Pairs Trade
Pairs trading was first introduced in the mid-'80s by a group of technical analyst researchers from Morgan Stanley. The concept uses statistical and technical analysis to seek out potential market-neutral profits.

Market-Neutral Arbitrage
Market-neutral strategies are a key aspect of pairs of trade transactions. Market-neutral strategies involve long and short positions in two different securities with a positive correlation. The two offsetting positions form the basis for a hedging strategy that seeks to benefit from either a positive or negative trend.

Pairs Trade Strategy
A pairs trade strategy is based on the historical correlation of two securities. The securities in a pairs trade must have a high positive correlation, which is the primary driver behind the strategy’s profits. A pairs trade strategy is best deployed when a trader identifies a correlation discrepancy. Relying on the historical notion that the two securities will maintain a specified correlation, the pairs trade can be deployed when this correlation falters.

When pairs from the trade deviate, an investor would seek to take a dollar matched the long position in the underperforming security and sell short the outperforming security. If the securities return to their historical correlation, a profit is made from the convergence of the prices.

Pairs Trade Benefits
When a pairs trade performs as expected, the investor profits and also mitigate potential losses that would have occurred in the process. Profits are generated when the underperforming security regains value, and the outperforming security’s price deflates. The net profit is the total gained from the two positions

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