You find two stocks with high correlation and go long one and short the other when the ratio of their two prices has diverged or narrowed to a level that, based on your statistical analysis or technical opinion or whatever, is too close or too far away.
Sorry to see that. I cant believe they dragged it below $20. I thought for sure late last month when the CEO made those super bullish comments, the stock looked poised to really take off as it had a $2+ break out on stupid volume. I actually put on a paper pair trade shortly after I posted this thread. I made out like a bandit, but it was really a fluke that AMD got taken down so hard. Obviously I married them in a synthetic ratio where I was long INTC & short AMD. Whats interesting is, I have noticed historically and perhaps more generally speaking, AMD will outpace INTC when its in a rally or accumulation mode and vice versa, where INTC is a much slower mover regardless of the market climate. So this is definitely worth further exploration.
This is the strangest market, but I figured Jan would be like this and I'm just not trading it. I cannot even guess where they're taking these stocks right now. It's the weirdest thing.
Thankfully my other stocks are performing. I'm going to wait to see where this stocks bottoms then double my position.
Why are you cheerleaders for amd? There's a price war, and intel has recently dominated amd with the core2duo and the kentsfield quad core. Even with amd's 4x4 platform, they still can't match the performance of the core2's. Especially with power consumption. Secondly, intel is producing 65nm chips and is getting ready to ramp up 45 nm production. Amd is still producing 90nm chips and has only recently started to ramp up 65nm. I would say that intel has made a come back. Their sales of the core2 are in the high end market and in the mobile market are taking over. Third, intel made huge layoffs over the summer, so their gross margin should be higher this quarter. So, last week the better pair was: short amd, buy intel.
Can you explain the tests you used? From my exerpience in pairs trading you use fundamentals to decide which stock to short and buy, then you use technical analysis to find a good entry ie: bollinger band extremes or rsi extremes. There is a way to look at short ratio to analyse a short squeeze in pairs too, but amd's short ratio has been dropping making it seem there is no fear in that stock. So, please explain.