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15 October 2010 ~ 0 Comments

What is Pair Trading and how things work!

Pair trading works by purchasing a stock and simultaneously selling short the stock of a second correlated so exciting couple of trade when relations between the two stocks has returned to its mean. It was a very active exchange by professional traders and hedge funds worldwide for decades.

To illustrate how the pair trade, we will give an example using coke stocks (ticker: KO) and PepsiCo (ticker: PEP). As you know, it is two very similar because they both operate in the same markets and sell the same products, soft drinks. For two KO and PEP are exposed to the same macroeconomic conditions and industry, their stock prices are measured at similar assessments of the market. That they will act with similar price / earnings and other valuation metrics. If you place a stock chart of KO, PEP and overlay on top, you will see that the two stock prices move in a very similar pattern over time.

From time to time, share prices that differ from each other. This is a pair trading opportunity, with the idea that buying and selling shares in the open reduced the population has increased, and the output once the relationship between populations correlated returns to normal. It is also known as mean reversion, statistical arbitrage, trading or market neutral long / short.

When you use a couple of trading, you must make sure that you do two similar stocks other examples of pairs of stocks are correlated Dell vs. IBM, Google and Yahoo and eBay vs. Amazon vs.. Ensure that commercial software shows you the relationship between the two corresponding populations are more than 70%, with a really good pair of over 90% correlation. Always having an equal share of your account in the long and short positions, this will keep your portfolio market-neutral, it is you are not exposed to fluctuations in the consumer market in ways that build on the relationship between the two Stocks correlation, not direct effect on the market, which is significantly reducing your risk and allows you to safely increase your negotiating leverage.

Since 1000 there is a store there for a couple of exchanges, it is impossible to calculate all the correlation values with the hand or spreadsheet, you will need a couple of trading software is to find the right equipment and pairs adds them to the checklist is to inform the trading signals. After downloading the list of titles for my pair of commercial software, it is therefore necessary to find the highest correlation between pairs of images of running back to the test. Once you find a list of pairs of stock for more than 70% agreement, add them to your watch, so it can inform trading signals, buy and sell stocks, wait a couple of returns to the average the signal.

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