Most traders love breakout strategies because they’re usually simple to find and easy to execute.
There’s little in the way of theory and breakouts are typically accompanied by volatility, so things tend to happen fast. In many cases, breakouts are also caused by news or other important fundamental announcements like quarterly earnings that can trigger serious momentum in the direction of the breakouts.
The biggest problem most traders experience with breakouts is the percentage of trades that end up being losers.
Breakouts are known for being the strategy that causes traders the most amount of grief.
Like most things in trading, it’s a double-edged sword. The best short-term trading tactics usually have the highest number of losers compared to winners… which means we must learn how to avoid false breakouts.
Learning how to find a pairs trade is one of the easiest skills to learn, and it can also be the simplest way to sow the seeds of victory in a traders’ account.
Before I dive into all the methods I use when looking for pairs trades, it’s always helpful to review the basics.
A pairs trade is when a person puts on a two-legged position. By that, I mean you’re going long one stock while also shorting another.
The strategy also involves matching the long and short positions in two stocks with a high correlation — cousin stocks, like going long Amazon and shorting the Chinese version of it, Alibaba.
The goal is to make gains when the stock goes up while also making gains on the other stock going down.
When I look for pairs trades, I don’t just want a random stock that’s going up some days at the same time as the other stock is.
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Day Trading is defined as the buying and selling of a security within a single trading day. This can occur in any marketplace, but is most common in the foreign-exchange (forex) market and stock market. Typically, day traders are well-educated and well-funded. They utilize high amounts of leverage and short-term trading strategies to capitalize on small price movements in highly liquid stocks or currencies.
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