Trading Pairs: Capturing Profits and Hedging Risk with Statistical Arbitrage Strategies
Traditionally, when you either buy or sell a stock, you hope that it moves in the one direction that results in a profit. However, at times, this strategy leaves you with a "naked" position that is simply at the mercy of the markets. Thus, pairs trading offers a unique alternative and allows you, the individual investor, a way to "hedge" positions. The goal is to protect your portfolio from dramatic market upswings or downturns, while finding stock relationship inequalities–all in an effort to make money.Written by Mark Whistler, a licensed securities trader and broker and leading arbitrage expert, Trading Pairs: Capturing Profits and Hedging Risk with Statistical Arbitrage Strategies clearly illustrates this profitable technique, and allows you to gain a new perspective on the markets as well as a new approach to investing. In addition, if you have access to the Internet and Microsoft Excel, the companionwebsitecan help you put everything in this book to practice, as well as track your pairs.This informative, yet easy-to-read guide begins by laying a small foundation that will help you form a solid understanding of pairs trading. You’ll be introduced to market basics such as liquidity ratios and shares outstanding. You’ll also receive a briefing on how both fundamental and technical analyses tie into pairs trading. Once the basics are covered and you’re familiar with pairs terminology, you’ll learn how to put this profitable technique to use in your trading endeavors.In straightforward and easy-to-understand language, Trading Pairs explores the fundamental, technical, and emotional cycles of the market’s rotational relationships, and illustrates how to capitalize on discrepancies when disharmony appears.It will discuss, in-depth, the importance of:Understanding correlations, including stock correlations in relation to indicesUsing statistics to: identify relationships, assist in determining the direction of the relationship, and ascertain how to execute your trades based on the data presentedDifferential versus ratioMoving averages and NSDMoney managementUsing Excel to trade pairsAnd much morePairs trading is by no means the "holy grail" of trading, but with the proper base of applicable knowledge and impeccable money management skills, you’ll find yourself with an effective trading strategy for any market environment. Filled with in-depth insights and practical advice, this book will help those who don’t have access to expensive trading software create live spreadsheets, track pairs like a pro, and increase the bottom line of their portfolios.