Pair Trading is the strategy of trading 2 assets at the same time, one long and one short. Pair Trading was formulated as a strategy that seeks to give significant and regular returns while controlling risk, by keeping a low correlation to more liberal market averages.
Pair Trading is a market neutral strategy intended to give profit in spite of whether equities go up or down. A profit or loss on a pair trade relies upon whether the spread amongst paired positions widens or narrows.
The strategy behind Pair Trading is to find out similar assets with dissimilar ratings. This is made by examining companies that are comparatively similar and interrelated but are valued differently by the market. Investors would then purchase the low-priced asset whereas selling the rich asset making for a convergence in value.
The strategy of pair trading is mean reverting. Where a pair of 2 extremely interrelated assets historically traded in a fixed range but currently trades one or more standard deviations away from historical means. A trader would seek a pair to revert to the mean.
In Floating Pair Trading, what traders do is to put the virtual value of one asset versus another. Suppose we select the Facebook and Twitter pair. The objective is to pick out which between the 2 stocks will do better throughout the stated period of time. In other words, traders have to determine if the value of Facebook stocks will be high or if the value of Twitter stocks will go beyond the former towards the end of the trading day.
The Facebook and Twitter Floating Pair returns are figured based on a virtual value amongst the 2 stocks. Thus if Facebook, which is the regarded as the favorite to win, gives a return of suppose 15%, the underdog Twitter will give a higher return maybe about 200%.
Fixed Pair Trading
One more way of Pair Trading is what is called fixed pairs. With fixed pairs, the returns are fixed in spite of which side does better. To win, all traders must do is to choose the winning side for the stated time period.
The objective behind Pair Trading concept is to make Binary Options trading even simpler. In reality, numerous traders after exploring pair trading choose this type of Binary Trading over the standard type of Binary Options trading, due to the simplified trading process. Even the inexperienced of Binary Traders is able to understand how pair trading functions.