Hi all, In pairs trading we have 2 assets. lets say now we have 3 assets moving together... how to generalize the pairs trading and do triangle trading? Thanks vm!
I would imagine you could treat 2 of the assets as a synthetic, as a single instrument. You would find some ratio between the 2 and then the third. i.e you might do 50% in A and 50% in B+C You would probably do this with baskets of stocks though that have a fundamental relationship. You would need a high capital and leverage and low fees to take advantage of such opportunities. Just thinking about this, you might combine various instruments together to form your synthetics based on sector.. So take all the healthcare and you form your synthetic healthcare and then you compare to other synthetic segments. Or maybe you take say all the tech stocks and short the group as whole but pick the strongest and go long them in same ratio. So for example, Long Leading Tech Short All Other Tech The risk to this strategy is that you are probably concentrated in a few top performers. Another strategy Long Leading Tech Long Beatdown Tech Short All Other Tech