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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