I am looking for some different ideas on how to trade pairs. Do people just look at highly correlated stocks and look at their past price differentials and trade when they get out of line? Or is there a better statistical way to trade pairs? Any ideas on how to trade pairs would be appreciated. Also, could someone provide me a list of different stocks that are popular with pair traders? thanks everyone
Pairs trading relies on "mis-pricing" and requires an eye on the fundamentals and the technicals for the stocks in play. There are a couple of large caveats to this methodology: 1. Most of those new to this type of trading are attempting to model a securities price - at the bare minimum you'll need to transform that data. Price data is a non-stationary time series. 2. The volatilities of individual securities are stochastic. 3. There's even less stationarity in correlations. 4. When the market goes nuts, all conventional measures of risk and reward go out the window. The stocks that are in play in pairs trading are those with adequate liquidity and volatility. In most simple cases a pair will be made up of stocks within a single industry group e.g long GM short F. There are other stat arb techniques using derivatives and cross-industry plays as well Hope this helps Cheers
Hi, maybe you'll find the info below about pairtrading helpful. http://www.tradetrek.com/Education/webclassroom/pairtrade.asp http://www.tradetrek.com/Education/webclassroom/convpairtrade.asp http://www.tradetrek.com/Education/webclassroom/diverpairtrade.asp This website offers also live pairtrade picks , among other features ( convergence and divergence pair plays ) for subscribers http://www.tradetrek.com/Pairtrade/default.asp Please note, that this is just an info. No judgement about the quality of the site nor an advise to use their services. regards &