What is meant by pair trading and its advantages ?
Pair trading is a trading strategy which matches a long position with a short position in pair of two highly correlated stocks, commodities, currencies, etf’s or options. Pair trading trades are not affected in any market direction (bearish or bullish) or gets less affected by it.Reason behind it is that while using this type of trading strategy we take long position with one commodity/stock and short position with other making trade neutral.This is why it is also called as neutral market trading strategy.Experts suggestions on option trading tips are often used by traders to trade in more risk free manner using this strategy.
Some advantages of pair trading strategy are discussed below :
- Profit in different market conditions
This strategy does not depends upon the market movements, it only depends on the the relation between the two stocks/commodities/currencies.In other trading strategies long traders gets benefited when market is rising and short traders are benefited when market is falling.For pair traders market direction is no matter of concern, only the stocks or commodities which are part of pair determines the outcome of each trade. This is one of the most attractive feature of pair trading.
- Limited risk
Risk is always limited and known with pair trading.The concept of pair trading strategy revolves around matching a long position with short position in related stocks or commodities which automatically creates a hedge because of which risk is limited and controlled.
Traders can predict two commodities for example gold, silver that have shown good historical correlation will converge again or not after a divergence easily. The most important step with this strategy is making a choice of good pair among all.
- Market’s volatile nature is no more an obstacle
Traders often fear to trade in market because of its volatile nature. At times it becomes really difficult to handle frequent market fluctuations.With pair trading, volatility will be your best friend. When prices between pairs diverge and converge many times offer traders with great possibilities of earning profit.
Traders with good market knowledge and trading experience can perform really well using this strategy. In commodity pair trading, mcx tips can be used for getting more positive trade results. Apart from above discussed advantages there are some disadvantages of pair trading as well which traders should be aware of. Commission and fees charged at the time of trading gets double with this strategy . Under normal trading strategy charges are to be paid one time but here two times commission have to be paid to enter and exit each trade.A good research work and proper interpretations of results is required to identify truly correlated pairs which can offer good trading opportunity.