Pair Trading Can Reduce Risk In Both Stocks And Forex Trading
Pair trading in one of the most popular trading strategies among stock traders when they take simultaneous positions in two similar stocks. Both these stocks are almost similar but for the time being are facing dislocation. Stock traders benefit from this temperary dislocation in these two almost similar stocks by going long in one and short in the other in equal dollar amounts.
What you do is try to find two stocks in the same industry and the same sector with a strong historical correlation between them. Yet for the time being, these two stocks are experiencing dislocation with one stock higher in price as compared to the other stock. Overtime, both the stocks are going to converge to the same price level.
You benefit from this convergence by going short on the higher priced stock and going long on the lower priced stocks. So when both the stocks converge, you make profit. If both don't converge, you don't lose much. So in pair trading, you try to profit from the convergence of the two stock prices to the historical levels.
Now this same strategy can be used in currency trading. The good thing in currency trading is that you don't have to buy two separate currencies. Pair trading is sort of in build in it as you can only trade currency pairs meaning you can go short on one and long on another or the other way around.
Now when you pair trade stocks, you are striping out the market influence from your postion by going short on one and long on the other. These two positions cancel each other as the market moves since both similar stocks are supposed to move in the same direction.
Currencies can also be viewed as stocks with countries replacing companies. Just like companies are affected by the broader economic fundamentals in the same way countries get affected by sovereign debt, trade protectionism, trade balance, budge deficit and so on. These things affect the respective currencies. Now two countries in the same region with strong trade and economic relationship can have their currencies behave in almost similar fashion. This is the basis of pair trading in forex.
Japanese Yen (JPY) was a popular carry trading currency. Traders were happy selling JPY and buying another high yielding currency like AUD. But in 2009, carry traders lost their risk appetite and suddenly started unwinding their yen positions. This massive buying back of JPY made JPY appreciate. So this appreciation of JPY is short term.
Korean economy is closely tied to the Japanese economy with its Won doing well but you can profit from this short term divergence in JPY and Won by trading the pair JPYKRW. Similarly you can pair trade Euro and Pound!
Questions and Answers
Article Tags:
pair trading
,pair trading stocks
,pair trading currencies
,pair trading forex
,trading pairs
To maximize your profits by trading at Forex markets, it is essential to know peak Forex trading hours. The peak hours are the intervals when market volumes are largest in the day and volatility is highest.
Forex Trading term used to describe the trading of the currencies of the various countries of the world is called foreign exchange, forex or just FX.
Playing the currency trading (otherwise known as Foreign Exchange or Forex trading) game can appear alluring or highly attractive sometimes, but the majority of people who try it lose money almost immediately.
Online forex trading training is a must for capitalizing on the best forex currency pairs, and even the best forex brokers endorse this. This article explores the best forex pairs and currencies in the trade today.
Forex Traders buy and sell international currencies based on currency trading signals. These signals are simply an instruction to trade. Success, meaning profit or loss, rides on identifying good quality signals. You can recognize the signals yourself, use a managed Forex service or subscribe to a service providing currency signals. Choose wisely or be prepared to lose your investment.
What is Forex trading? In this article we give you a brief introduction into the Forex market and how it works and also some of things to look out for.
Mostly, a stock broker's career is defined by the financial advisor recruiter firm that hires them; this highlights the importance of the decision to join one.
Loans for people on benefits enable you an access to quick cash so that you can meet up all your pending needs easily.
Many people can't afford to obtain their own vehicle because of the financial state these days. One choice is to have pre-owned cars while another is to seek out car finance solutions that will allow an average individual to buy the favorite vehicle.
Residential real estate investments offer a history of proven investor gains. At the same time, the success path is littered with failed investments and investors.
Property auctions are extremely exciting! Whether you're a buyer or seller they definitely have an "edge of the seat" quality to them.
If I say any more good things about Bill, you won't believe me. Let his FOREX Income Engine Trade Alert Software do the talking. You need to make your move now...
Vladimir Ribakov is a well known active professional trader, who discovered his passion for educating home-based traders, showing them how to profitably trade Forex, commodities and indices. Vladimir's Forex Signals & Mentoring service is actually his "virtual trading office", where he provides alerts on all the trade that he takes, while communicating with his service followers, reviewing the markets in real time, teaching his methods and analyzing trades.
Retire On $1000? Can $1000 give you a multi-million dollar nest egg?A lousy thousand bucks. That's what my friend Nathan Gold uses as the starting point of a stunning 5-step "trade-wave" that he's just added to his already popular website. Nathan shows you how that lowly $1000 could potentially grow into an amazing 7-figure retirement nest egg that you simply have to see with your own eyes.
Your gift - Line Trader download…Learn Money-Making Trading Secrets Of The Highest Paid Super Star Trader Plus One Of His Secret Weapons...And It Won't Cost You A Dime...Read everything in this because it's all important. Instructions below on how to download the Line Trader.
On the house, Pattern Recognition Software! Forex Master Method Is Simply A Profit Machine…Your copy of the Candlestick Pattern Recognition software is waiting for you...Before we start, I want to ask you a potentially life changing question?
Discuss this Article
