What is a stock pair?
A pairs trade is a trading strategy that involves matching a long position with a short position in two stocks with a high correlation. Pairs trading was first introduced in the mid-1980s by a group of technical analyst researchers.
How do you know if a stock is trading for pairs?
1.Identifying the relationship between stocks Many investors will look for securities in the same sector or industry group. The correlation between companies in different sectors tends to be lower.
What is a pairs trading strategy?
Pairs trading is a non-directional, relative value investment strategy that seeks to identify 2 companies or funds with similar characteristics whose equity securities are currently trading at a price relationship that is out of their historical trading range.
Why do we trade in pairs?
The pairs trade helps to hedge sector- and market-risk. For example, if the whole market crashes, and the two stocks plummet along with it, the trade should result in a gain on the short position and a negating loss on the long position, leaving the profit close to zero in spite of the large move.
Which stocks are good for pair trading?
One of the best ways to facilitate pairs trading is to invest in steel, especially now. Two correlated stocks that work well for this trade include Nucor (NUE) and Schnitzer Steel A (SCHN), both which, when combined in the same portfolio, diversify away stock market risk. Both are steel stocks and considered cyclical.
Is pair trading still profitable?
The strategy is profitable in all years. We get the highest return in 2020 with 186.44%. Most of the profit comes from the long side, 267.6%. Short entries give us a return of 72.8%.
Is pair trading arbitrage?
A pairs trade or pair trading is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy.