The Secret to Trading in Pairs

 
Jeff here!

I'm excited to get our trading journey started. But before I do, I think it's important that you understand what kind of trader I am.

You see, one of my specialties lies in the art of pairs trading.

Also called "linked trading," this strategy works by going long on a stock or ETF you think will outperform the market, and then pairing it with a stock or ETF you think will underperform by going short.

In a nutshell, pairs trading is buying a strong security and selling a weak security — both of which have an inverse relationship with one another.

To give you an example of how this works, consider U.S. presidential elections (after all, who could forget the last inaugural race?).

No matter what side of the aisle you fall on, there's no denying that one group of stocks tends to do well if Republicans win the office … and that another group of stocks tends to do well if Democrats win.

The outcome of the election itself isn't the point — just the fact that each group of stocks are "linked" to one another through a common cause.

The two groups of stocks in question are polar opposites of one another based on each party's ideology, so when one group has a good day … it's likely to be a bad day for the other.

Of course, this is just one example.

There are many different kinds of "linked" trades across each of the market's sectors. The trick is finding them, and then knowing how to position yourself to make the biggest profits.

Don't worry about this last part. After all, that's why I'm here!

When to Use Pairs Trading

A pairs trade is a good strategy to use when you don't know what the market is going to do — but it's also a great approach for market opportunists like you and me.

You see, the best part about pairs trading is that you don't have to be right about both sides of the trade. You only have to be right about one side.

Usually in a bull market, the strongest stocks will jump the highest … and in a bear market, the weakest stocks tend to fall the most.

But pairs trading automatically gives investors strong relative strength (the price trend of a stock compared to another stock) correlation … aka the strongest stock versus the weakest stock in the same industry.

This style of trading is incredibly consistent, and it works no matter what current market condition we're in — up, down or sideways.

In other words, you'll always have a chance to profit from one area of the market going up — or, inversely, another going down.

How I Find Pairs Trades

I told you before that I have certain tools at my disposal that allow me to gain an edge over Main Street and Wall Street investors alike. And now that you're a Joy of the Trade reader … you get to benefit from these advantages, too!

One of the sharpest tools in my trading arsenal is my at-home Bloomberg terminal, which gives me access to certain market data that even professional traders don't have.  

This data allows me to scour corners of the market that often go unnoticed, pinpointing areas with the highest probability of soaring higher … or crashing lower.

Once I find an area of the market that I believe has a strong link — and that might make a good pairs trade — I roll up my sleeves and do my research to make sure I can make sense of the relationship.

I won't lie … this is partly an artform. And it comes from years of experience "reading the tape," so to speak.

But once I find a trade idea that I have a strong conviction about, I'll let you in on it immediately. While many of the ideas I tell you about have to do with stocks and ETFs, you can also play the options market to get even more bang for your buck.

It all depends on your level of experience and risk tolerance whether you want to trade the stock, option or both. That's totally up to you.

If any of this sounds intimidating right now, don't worry. It'll all make sense once you start reading my weekly updates and watching my videos.

You can even get a head start by checking out my YouTube channel, where I regularly post new money-making ideas and strategies for you to take advantage of. (Don't forget to like and subscribe!)

I also upload content to our dedicated Joy of the Trade website, which I encourage you to check out when you have the time. There's a ton of great information there that you don't want to miss.

Stay tuned, because tomorrow I'm going to answer some of my most frequently asked questions regarding my investing philosophy and risk-management techniques … plus other market-beating trading strategies I have up my sleeve!

Jeff Zananiri
 
 

A MarketWealth Publication

Disclaimer & Disclosures
The information in this email is intended for informational purposes only and does not guarantee specific results as there is a high degree of risk involved with trading. Also, our traders are real traders and may have financial interests in the companies discussed.  Please see our Terms and Conditions for more information.

 

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