Pairs trading system is a low risk form of trading with cryptocurrency setup, wherein the investor tries to invest in two legs of a pair at the same time, and one he speculates would move up in price, and the other he speculates would move down in price, both reaching to the normal average price over a period of time. Understanding a pairs trading system is a simple concept, let us see this in more detail.
Some Basics of a Pairs Trading System
In Pairs trading system, two closely related instruments are used, for example to cold drink brands, or two cryptocurrencies with the same blockchain etc.
The two instruments used are knows as two legs of the pair.
In Pairs trading system, the investors tries to profit from almost all market trends, be it downward trend, upward trend or sideways movement in the price of some cryptocurrency.
In Pairs trading system, the basic principle that is believed to happen, is that sooner or later, the prices would converge towards the normal price, and the shift as of now is just temporary. This is also termed as market-neutral approach.
The investors who can hold the long positions for longer in a Pairs trading system, can make more profits.
A correlation of 0.80 in the two legs is a sufficient condition for a trader to invest in a pairs trading system, but this is often hard to identify.
How Does a Pairs Trading System Work
Understanding a Pairs trading system has been made easy with the following example:
1. An investor decides to invest in both Bitcoin and Altcoin, as these are two cryptocurrencies highly correlated.
2. Bitcoin and Altcoin are considered as the two legs of this pair trade.
3. Now the price of Bitcoin is speculated to rise, so the investor would go in a long position for Bitcoin.
4. The price of the Altcoin is speculated to fall, so the investor would go in a short position selling his Altcoin.
5. In the end, the profit would be made due to the convergence in the prices of the two cryptos.
Trading Better with a Pairs Trading System
You might have seen so many investors making money out of cryptocurrency pair trades, when you were not even able to identify the opportunity! The secret is that investors, both large and small, are employing expert online consultants, like execuium.com, who help them identify such opportunities and then indulge in a pair trade. A pairs trading system, although not very risky, but requires to be done at the right time, with the right cryptocurrencies for maximum profit. A lot of complex mathematical calculations and statistics aid this decision of whether or not to enter a pairs trade, when to do so, and how much must ideally be invested in a pairs trading system depending upon your portfolio. Understanding a pairs trading system is simple, but carrying it out in the real world requires quite an expertise!