Don, first off,thanks for being so honest and contributing so much to this board..my question is in regards to "pair trading". i went to the attachment you provided but have a few questions.. first off,an example that site gave was going long MSFT and short IBM..these are two software companies..do you pair trade within a sector like going long one semi conductor company and short another semi? what is the simple logic behind this? thanks Don.
Determining proper pairing is a pretty detailed process, but, yes, you can start with similar businesses withing the same sector. You really need to dig deep into the fundamentals of each company, know their business models well, and how they compare to each other and their industry group as a whole. What we try to do is determine which kind of pair each is...what we call A, B, or C (basics)...wherein A is bias to stock A for the long, B is bias to stock B, or C where we find a great tradeable pair with little or no reason for fundamental bias (and simply trade this based on various short and longer term factors such as average daily trading range, etc. Fortunately, a lot of this grunt work is being done by our guys at PairCo on a daily basis....but we still have a family member who searches for new pairs on a daily basis...just to feed the family portfolio of pairs. Don