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Pair Trading

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6 replies to this topic

#1
easha

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    Pair trading, also known as statistical arbitrage or spread trading,
    is a strategy that allows the trader to capture anomalies, relative
    strength or even fundamental differences on two stocks or baskets
    while maintaining a market neutral position. This powerful trading
    strategy once used only by large institutional investors and hedge
    funds has been adapted for implementation in your taxable trading
    accounts. Market neutrality has never been more important, as it
    allows the trader to capture profits in up, down, or sideways
    markets while giving you the freedom from having to predict the
    direction of the overall market.

    The key to the strategy is simply finding correlated stocks
    (preferably NYSE mid and large capitalized stocks), exploiting the
    times when they diverge from their correlation, following simple
    rules of entry and exit, and having a disciplined money management
    system in place.

    When pair trading, you're usually trading two correlated stocks;
    sell short one stock while simultaneously buying the other. You've
    then "hedged" yourself to the market and therefore the market is
    free to do what it wants. If the market goes down, your short
    position should make money. If it goes up, your long position should
    make money. Of course, while each side of your trade is making
    money, there's the other side that is losing money. However, that's
    the key to pairs…you can be in a pair while the market is moving
    quickly and your pair price can barely move 50 cents. Why is this
    beneficial? The pair helps curb the price action and increases the
    predictability of the action.

    In other words, the pair of the two stocks creates tighter, more
    predictable ranges for the trader to trade. It's then your job as
    the trader to wait for the time when one of the stocks jumps out of
    it's normal correlation and play for the pair to come back to
    normal, or to occasionally trade toward the convergence.

    Let us emphasize a key difference with pairs: you're not trading the
    individual stocks based on their direction, but rather trading the
    difference between the two stock prices. This is called trading the
    differential and you'll quickly learn that this key difference makes
    this type of strategy very different from other trading
    methodologies. In pair trading you'll move away from the dependency
    of following the market's direction and instead focus on trading the
    chart of the difference of the two correlated stocks.


    Seniors(especially sid, mateen, muzamil, adeel, ahir and stock guru) need ur comments about this technique.
    Can anybody comeup with some pairs which we can correlate with each other?
    The only thing worse than beating a dead horse is BETTING ON ONE.


    #2
    Sid2

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    View Posteasha, on Nov 25 2006, 08:30 PM, said:

    Seniors(especially sid, mateen, muzamil, adeel, ahir and stock guru) need ur comments about this technique.
    Can anybody comeup with some pairs which we can correlate with each other?
    I can't really comment on the technique, because I don't use mechanical systems ....

    In terms of correlated stocks, examples would be:
    SNGP & SSGC
    MCB & NBP
    DGKC & LUCK
    PSMC & INDU etc.

    #3
    Stock Guru

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    Pairs trading is used to hedge sector and market risk, Pairs trading involves buying and selling two related stocks when their prices diverge in the expectation they will move back together over time investors use this strategy because it is regarded as less risky than an outright purchase or sale. Implementation varies but the idea is the same to buy the undervalued pair and sell the overvalued pair for example, if the market as a whole crashes and your two stocks plummet along with it, you should experience a gain on the short position and a loss on the long position, leaving your profit close to zero in spite of the large move. In a pairs trade, you are not making a bet on the direction of the stocks in absolute terms, but on the direction of the stocks relative to each other, it is a really confusing and difficult kinda strategy you need a mathematical nut to dig out corelated stocks.

    Posted Image


    #4
    AbDuLmAtEeNkHaN

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    Dear Easha Jee ...

    Some Answers you will get from the the link given ....

    http://www.learnmone...ng/pairs-1.html

    Posted Image




    Click Here For: "Daily Reports From Different Brokerage Houses"
    Note: Please make your own due diligence before making any decision

    Regards,
    Abdul Mateen Khan

    #5
    AbDuLmAtEeNkHaN

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    Dear Easha Sis,

    Here a very good Book i found for you and hope others Also will benefit from it .....

    Please download it from the following link ... only after market hours not in market hours thx



    Pairs Trading--Quantitative methods and analysis (Wiley Books).pdf

    Posted Image




    Click Here For: "Daily Reports From Different Brokerage Houses"
    Note: Please make your own due diligence before making any decision

    Regards,
    Abdul Mateen Khan

    #6
    azra

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    View Posteasha, on 25 November 2006 - 09:30 PM, said:

    Pair trading, also known as statistical arbitrage or spread trading,
    is a strategy that allows the trader to capture anomalies, relative
    strength or even fundamental differences on two stocks or baskets
    while maintaining a market neutral position. This powerful trading
    strategy once used only by large institutional investors and hedge
    funds has been adapted for implementation in your taxable trading
    accounts. Market neutrality has never been more important, as it
    allows the trader to capture profits in up, down, or sideways
    markets while giving you the freedom from having to predict the
    direction of the overall market.

    The key to the strategy is simply finding correlated stocks
    (preferably NYSE mid and large capitalized stocks), exploiting the
    times when they diverge from their correlation, following simple
    rules of entry and exit, and having a disciplined money management
    system in place.

    When pair trading, you're usually trading two correlated stocks;
    sell short one stock while simultaneously buying the other. You've
    then "hedged" yourself to the market and therefore the market is
    free to do what it wants. If the market goes down, your short
    position should make money. If it goes up, your long position should
    make money. Of course, while each side of your trade is making
    money, there's the other side that is losing money. However, that's
    the key to pairs…you can be in a pair while the market is moving
    quickly and your pair price can barely move 50 cents. Why is this
    beneficial? The pair helps curb the price action and increases the
    predictability of the action.

    In other words, the pair of the two stocks creates tighter, more
    predictable ranges for the trader to trade. It's then your job as
    the trader to wait for the time when one of the stocks jumps out of
    it's normal correlation and play for the pair to come back to
    normal, or to occasionally trade toward the convergence.

    Let us emphasize a key difference with pairs: you're not trading the
    individual stocks based on their direction, but rather trading the
    difference between the two stock prices. This is called trading the
    differential and you'll quickly learn that this key difference makes
    this type of strategy very different from other trading
    methodologies. In pair trading you'll move away from the dependency
    of following the market's direction and instead focus on trading the
    chart of the difference of the two correlated stocks.


    Seniors(especially sid, mateen, muzamil, adeel, ahir and stock guru) need ur comments about this technique.
    Can anybody comeup with some pairs which we can correlate with each other?
    Considering level of market ,any one to suggest a few pairs






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