Advantages with Pair trading
There are numerous advantages with Pair trading compared to normal "directional" trading. It is no coincidence that a majority of all hedge funds use different variants of Pair trading to achieve consistent profits in all kind of market environments. Actually Pair trading is absolutely outstanding especially when most traders have a difficult time during consolidating and "choppy" market conditions combined with high volatility. When "normal directional" trades get stopped out the open hedged Pair trade is moving back and forth like a boat on a stormy ocean and can deliver profits when your Take Profit settings are met.
1) Predictability
It is far more easy to predict that two assets that have shown a good historical correlation will converge again after a divergence than that a certain asset should reach a certain specific level.
It is far more easy to predict that two assets that have shown a good historical correlation will converge again after a divergence than that a certain asset should reach a certain specific level.
2) Direction does not matter
What I mean with this is that you do not have to be forecasting the direction of a certain asset in order to make a profit. In fact You can earn money whether the market goes, up, down or sideways. As long as the Asset you are long is performing relatively better than the one you are short.
What I mean with this is that you do not have to be forecasting the direction of a certain asset in order to make a profit. In fact You can earn money whether the market goes, up, down or sideways. As long as the Asset you are long is performing relatively better than the one you are short.
3) Volatility is your friend
In normal trading volatility can be hard to handle. Markets that rush or fall dramatically only to recover the next minute and reverse. This market action is further increased due to all triggered Stop-Losses mainly from small traders. When you are Pair trading volatility is your best friend. Days when prices between pairs diverge and converge several times offer great profit possibilities. (A little advertising is in place: This is extra useful if you have the tools to help you profit and both enter and exit according to pre-set parameters like my Pair trading EA.)
In normal trading volatility can be hard to handle. Markets that rush or fall dramatically only to recover the next minute and reverse. This market action is further increased due to all triggered Stop-Losses mainly from small traders. When you are Pair trading volatility is your best friend. Days when prices between pairs diverge and converge several times offer great profit possibilities. (A little advertising is in place: This is extra useful if you have the tools to help you profit and both enter and exit according to pre-set parameters like my Pair trading EA.)
4) You are hedged
This is for me personally the absolutely best advantage with pair trading compared to "normal" trading. Even if this is true for all Pair trades individual stocks naturally can react drastic after earnings reports. But apart from that and especially if you are Pair trading major stock indices like the DAX, FTSE, CAC40, S&P500, OMX you know that even if there are extreme news causing a drastic drop in all markets, You are holding a hedged position. I have many times had large open Pair trades over the weekend and even when big news affected all prices with huge opening Gaps on Monday my Pair trades were still doing just fine and sometimes even delivering faster profits due to the volatility.
This is for me personally the absolutely best advantage with pair trading compared to "normal" trading. Even if this is true for all Pair trades individual stocks naturally can react drastic after earnings reports. But apart from that and especially if you are Pair trading major stock indices like the DAX, FTSE, CAC40, S&P500, OMX you know that even if there are extreme news causing a drastic drop in all markets, You are holding a hedged position. I have many times had large open Pair trades over the weekend and even when big news affected all prices with huge opening Gaps on Monday my Pair trades were still doing just fine and sometimes even delivering faster profits due to the volatility.
Pair trading Basics
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Find suitable Pairs to trade
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