Pair trading is often called spread trading or statistical arbitrage. The term implies an anomaly capture strategy. In addition, the benefit is received by a participant working on fundamental differences in stock prices. The pair trading strategy works if the market is stable. Its development is based on the idea of finding correlated securities. The trader calculates the moment when prices diverge, manages the funds at his disposal very carefully, carefully observing the entry and exit rules in force on the market. This allows you to achieve good profits with relatively little risk. There is a special platform for automating pair trading on the MICEX, which makes the workflow easier, more efficient.
Work: difficult but easy
When using the pair trading method (Yudin or in another way), a market participant finds correlated securities. Shares whose price is reduced must be sold, and the money received invested in other securities. This is actually self-hedging. Therefore, this logic is effective even when nothing changes in the market. It is believed that one of the main advantages of pair trading at Forts is independence from external conditions.
With a decrease in the market, stocks whose rate is falling become a source of income. If the market rises, profits can be obtained through those securities whose value is increasing. But you need to understand that all stocks with this approach have a pair. When one paper from a pair grows, the second becomes a source of loss. With the successful formation of a package of securities, the profit that the trader receives significantly exceeds the losses. The adviser for pair trading helps you choose the right set for the portfolio.
Predictability and reliability
Using such a strategy for earning in the securities market is the best way to get money in conditions when stocks are characterized by significant changes in value. Reasonable pair trading at Forex turns the market situation into a predictable one, which means it’s easier to think through a strategy for making money and make your own profit.
Pair trading is a method of creating a predictable trading range for a trader to work with minimal risks within tight trading boundaries. A key feature of the strategy is the search for the right time, that is, the technology is not suitable for people who are nervous, impatient, unable to wait for the right moment. To some extent, pair trading is comparable to the actions of a spider. You will be patient and attentive enough - and the extraction, the profit will be yours. But for this you have to wait until the security price goes beyond the normal range.
It is important!
When developing your own Forex trading strategy , it is very important to own a theoretical base. In particular, quantitative methods and methods of analysis in pair trading are quite different from other strategies.
When opting for pair trading, trading is not in stocks, as in the classic version, when a market participant expects to sell the acquired stocks at a new price, and the difference between the rates remains in the trader’s pocket. But pair trading at Forts involves working with pairs of stocks, that is, the strategy differs quite a bit from the classic version.
Randomness captures the market
The securities market is actively developing, and this is especially noticeable in recent years. Over a decade, the Forex market has literally changed beyond recognition. Strategies that worked flawlessly 5-7 years ago now show complete inefficiency. The modern securities market is rather chaotic, and changes in it occur almost by accident, so even specialists cannot manage to guess them in advance. There are calm periods on the stock exchange, but they are too short to be able to bet on them. Outside of these “islands of stability” it is difficult to make accurate forecasts. This was the reason for the popularity of pair trading with options and securities.
If a trader builds a strategy on the ability to predict the development of the market, if he chooses only one share and concentrates on it completely, there is a high probability that the exchange trading participant will end up with nothing. Experienced people say that often events develop in contrast to the predicted direction. A similar issue is devoted to various books written back in the 90s of the last century. True, then, with high instability, the situation was predictable, predictable, which can not be said about our days. The tools offered in those years have lost their relevance, and they have been replaced by indicators of pair trading, which allows you to really make money using this method of trading on Forex. Pair trading is recognized by many professionals as the most relevant of the existing methods of working on the exchange.
To risk or not?
Sooner or later, almost any trader faces such a dilemma. Everyone would like to get money through Forex, but everyone would like to avoid risky situations, but not everyone believes that this is possible. It is no secret that the higher the risk, the greater the probability of earning, and with a minimum risk to capital, the trader will receive nothing. But this is the official position, contrary to which there is a pair trading. Of course, it is completely impossible to exclude losses, even if you use this technique, but you will be able to minimize them.
Pair trading is a neutral trading investment system based on several (two or more) assets. Beginners believe that this approach is available only to “market sharks,” but in fact you can resort to the methodology even when there is no large capital available. Pair trading has been available to everyone interested for several years now.
Basic features
What does the term trend neutrality mean? It suggests a strategy unrelated to price impulses. Consequently, earnings are possible both with an increase in the price of an asset, and with a fall. But only a well-formed portfolio of securities becomes profitable. Having typed "what’s horrible", you can’t count on success.
Trend identification is one of the main difficulties in making money at Forex. The described system allowed to get around it. In addition, pair trading allows you to work with different markets, there is no strict binding to the direction. This became the source of such great popularity of the strategy. A significant role was played by the events of 2008, which received the title of “The Great Recession” in specialized literature. Practice has shown that pair trading allows you to save capital even in the face of an unpredictable market decline.
Strategy: fit wisely
The basis of pair trading, as mentioned above, is the correlation of securities. The phenomenon itself has not been used for the first century, it simply did not have a special term before. For the first time in science, correlation attracted the attention of, oddly enough, biologists, and the concept was formulated as early as the 19th century.
The patterns on which pair trading is based are quite complex in terms of mathematics and statistics. However, an ordinary trader does not have to crawl into such jungle, it is important to catch the principle of work. Correlation shows how strongly some quantities are related to each other (two or more). It is most obvious when two quantities are observed, a change in one of which entails an adjustment to the second.
Scientific approach: is it important or not?
A novice trader may suggest that some of the two stocks are related. Moreover, having studied the numerical values, he can decide that this statement is proved. But this approach is called “by eye” and almost always leads to failure. Scientific research is not carried out “anyhow”, accuracy and regularity are important here. Statistics introduces the concept of "correlation dependence", and also knows several formulas by which the coefficients of coupling values are calculated.
Within the framework of exchange trading, the Spearman formula is considered one of the most effective. It consists of fairly simple operations, but there are many of them, which makes the calculation a daunting task. So that traders do not have to rack their brains over this, the iCorrelationTable indicator was developed. It allows you to evaluate the relationship of two or more securities, without resorting to cumbersome formulas.
Thorough analysis
Using indicators developed by specialists using complex, bulky, but accurate formulas, one can easily calculate the development of the situation regarding the selected securities. A good indicator does not just analyze the pair given to it, but provides the user with a full-fledged relationship matrix. In this case, the trader can set the matrix elements independently, so that the system produces the most useful data. Optimization of the working profile, and even simple tools, makes it possible to quickly master the work on the market, and in the future - to reduce time costs.
The popularity of indicators is not accidental. They are indispensable for pair trading, and it, in turn, is beneficial in all markets. Therefore, it is possible to analyze not only Forex trading tools, but also stocks of companies and other CFDs.
Forex market: how to work?
When choosing assets to work in the foreign exchange market, most often users dwell on pairs made up of US dollars, British pounds, euros, and Swiss francs. Experienced specialists also offer to pay special attention to these currencies. The logic is as follows: the indicated money has a fairly obvious relationship, which means that you just need to open a cross-rate position, and you can already work. In the classic version, euro and dollars, dollars and pounds are combined, or euros and dollars, dollars and francs.
Imagine the following situation. A certain trader drew attention to the fact that there is an interconnected pair of currencies and the dynamics of the exchange rate diverge. Suppose the changes are such that they provoke a pair of euro and dollar and a pair of pound and dollar. The convergence of quotes is such that it seems that you can make good money on this. If volume transactions coincide, then the trader actually makes a synthetic bet on raising the euro-pound pair. Pair trading becomes meaningless.
Problems and Features
Why in the described example does the trader encounter such difficulties? First of all, we are talking about risks. The deal is such that the currency market participant is actually faced with a volatile cross rate. In addition, the operation involves additional steps. In fact, it’s easier to simply buy or sell euro-pound currency pairs. This option is for any DC.
Almost any Forex course used today works according to the same scheme. Therefore, choosing a currency pair, you need to analyze the assets of various trading floors.
For example
One of the simplest and most illustrative examples is the relationship between the ruble exchange rate and oil prices. The correlation estimate is about -0.97, while the minus indicates that the movement of quotations is in different directions. When planning to work with a couple of ruble and oil, a trader must remember that in the first place is the change in the cost of oil. If we analyze the changes in the ruble exchange rate, we can see that they duplicate the way the prices of “black gold” changed. As soon as the energy source becomes cheaper, with it it loses its price and the ruble, it works in the opposite direction.
In addition to the relationship between the ruble and oil prices, analysts track the relationship between oil and the dollar. The ratios within these pairs often do not match. This is due to the global economy, the behavior of the Fed, the Bank of Russia.
The task of the trader is to predict the moment when deviations add up in his favor. Anomalies do not last long, which means that it is important to keep a finger on the pulse.
Significant factors
The reasons that destabilize the prices of currency pairs are very different. Having chosen the object of earnings for himself, the trader should clearly know what affects the courses, and only in this case he will be able to quickly identify the moments when profit is waiting for him with the pair trading strategy.
In particular, in relation to the described example, significant events will be periods when large firms pay taxes, sell revenue in foreign currency, as well as days when external corporate debts are paid. At this time, the demand for the currency of another state from Russian enterprises is growing. As soon as the calculations are completed, the market situation stabilizes.
You can make money on pair trading if you grasp the fluctuation in exchange rates associated with statements by the Central Bank, the Fed and other significant structures. Decisions on rates taken by the Central Bank also have a certain impact on the situation on the exchange.