ALUMA CAPITAL FSP 46449

Online Trading Specialist

Rolling Trade Ideas 




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Aluma Capital clients received the following high-probability trade idea via SMS:


Pairs Trading Explained

Pairs trading is when a simultaneous long position is taken in one stock while a short position is taken in another.

The stocks must be highly correlated, meaning most of the time they move in the same direction. Typically, this is seen in the stocks of companies that are very similar.

Since the stocks of these companies move in a similar fashion due to their similar business—we always must check to make sure they are moving in a similar fashion—when their stocks diverge it presents a trading opportunity. The strategy is to buy the stock that is underperforming and short-sell the one that is outperforming the other. Doing this safely requires some research and risk controls.

    

Before utilizing this strategy we first must see if two stocks are correlated. We want them to move in tandem most of the time; that way, when they diverge from one another, if history holds true, then eventually they will revert back to trading in tandem and a profit can be made. 

The Pairs Trade:

LONG:

 SHORT:

When Placing the Pairs Trade it’s extremely important that you use the same quantity of CFDs and/or Rand exposure for both Short and  Long. 

*Remember that pairs trading involves taking a long and short trade simultaneously in two typically highly correlated stocks with similar volatility. A long position is taken when one stock underperforms by a certain threshold, and a short trade is taken in the outperformer, with the intent that the stocks will eventually revert to the historical norm thus resulting in a profit. 

Risk Disclaimer: Trading Futures, Forex, CFDs and Stocks involves a risk of loss. Please consider carefully if such trading is appropriate for you. Past performance is not indicative of future results. Articles and content on this website are for entertainment purposes only and do not constitute investment recommendations or advice.