Pair trading takes a unique approach to market trading. The pairs trading system brings in-play a strategy which involves market-neutral trading, which is in itself very interesting. The trading system aims to match short and long positions together, such as stocks. To put it in plain English, a pairs trading system is another form of trading in the financial markets.
Investors seek to profit from both increasing and decreasing prices of correlated stocks. The decrease or increase can be in one or more markets. As a result, there are fewer risks, and some are avoided entirely, although the practice is not 100% devoid of risks.
It’s crucial to understand how the Pairs Trading System works to use it effectively.
How Does The Pair Trading System Work?
1. Matching long and short positions are taken by the investor in different stocks, but which are highly correlated. For example, cryptocurrencies, options, exchange-traded funds, etc.
2. Say you choose cryptocurrencies; you could choose Bitcoin and Altcoin, for example, as they are highly correlated.
3. The selection is made with an objective to increase the return from the selected stocks while decreasing the risk of loss from market movements at the same time. However, making a selection is fierce, and companies like executium.com play a significant role here.
4. As soon as there is some weakness in the correlation of the two selected stocks, the investor taps the opportunity. He goes long over the under-performer and short-sells the over performer. We see that this short sell is used as a hedge for the downside risk of the long position of the under-performer.
5. The positions are then closed, and the relationship returns to the statistical norm.
6. Profits are made in two situations: when the long goes up more than the short, or the short goes down more than the long. So the difference in price change of the instrument is the deciding factor.
Understanding The Pair Trading System
Take an example of the cryptocurrencies Bitcoin and Altcoin, and suppose you were to buy both. Usually, the prices would go up and down in sync with the other; however, if the price of Bitcoin rises when Altcoin remains the same or drops in price, investors would buy Altcoin and sell Bitcoin. Sooner or later, the prices will return to the historical price line, and that’s when the investor would sell Altcoin. The investor could potentially make a considerable profit out of the total trade. If Bitcoin falls or Altcoin rises to close the gap, both would be money-making conditions for investors.
Why Should You Go for a Pair Trading System?
A pair trading system must be chosen because it does (usually) allow you to profit from any market trend, whether it’s upwards, downwards or sideways. The principle behind the pair's trading system is that it’s caused by the temporary changes in the supply and demand of the stocks, which cause price fluctuations before converging once again. It makes it profitable in the end while hedging the risk of loss at the same time.
However, the pair's trading system is a complicated form of trading and is considered tough even by investment managers and market spectators. It’s a prerequisite that instead of doing it on your own, as a single investor, you must hire the services of a professional or expert such as executium.com. Executium.com offers good timing forecasts and quick decision making for the pair's trading system. The opportunities for pairing trading systems are usually rare and therefore it is essential to hire such vigilant companies, who track market trends and price fluctuations.