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Pair Trading on Forex: Search for Alternative Strategies by Alexander Demin

Pair Trading on Forex: Search for Alternative Strategies by
Article Posted: 04/04/2017
Article Views: 894
Articles Written: 9
Word Count: 601
Article Votes: 34
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Pair Trading on Forex: Search for Alternative Strategies

Business,Finance & Investment,Investment

The deplorable outcome of the recent financial crisis was the fact that the main stock indices of the domestic market could not get to the previous level. This and a number of other factors was the main reason for the decline in the prestige of the stock market as such, the loss of interest in long-term investments. Losses of mutual funds for the last 4 years that have passed since the end of the economic crisis change tens of billions of dollars. Fundamentally changed the priorities of investors: the vector of their attention shifted from shares (risky instruments) to bonds (instruments are conditionally risk-free). The stock market will never remain the same - against the backdrop of this, new ideas arise about investing. For a long time to stay on speculative short-term strategies is unlikely to work out - a positive result (due to extreme sensitivity to market phases) is not guaranteed even by them.

What alternative ideas attract the attention of participants of Forex - the market sphere, inside of which is trading not only currencies, but also securities of world’s leading companies? Increasingly popular is pair trading.

What are we talking about? What strategies are hidden behind this term? So it is common to call the investment strategy (neutral in relation to the market), which is based on the features of the correlation of price dynamics for highly liquid assets. What is the neutrality to the market? In most cases, the ability to occupy two opposing positions, proportional in size (short-term and long-term investments). Participants in Forex minimize possible losses - even with a sharp change in the market conditions, investors will receive their dividends. The fundamental principle of pair trading is the ability to identify pairs of securities, the degree of correlation of which is the highest. Some assets grow in price, others - fall (relative to the first). After there is a sale (short) of a revalued security, as a result of which a beta-neutral portfolio is formed. The yield of it depends not on the general direction of the market sphere, but on the ratio of assets to each other.

Periodically, anomalies occur - one of the assets may well start a "single sail". The spread between pairs in this period is widening as much as possible, and traders have a unique opportunity to implement pair trading strategies in practice. Forex participants expect that in the very near future a high correlation of assets will recover, as a result of which the spread will naturally narrow.

The main advantage of an alternative strategy is that you can make money regardless of what is happening on the whole in the market. Points of shares fall or, conversely, increase - traders still stay in profit. As mentioned above, the profit extraction is carried out taking into account the mutual dynamics of assets (it is important in principle to select a pair correctly). Forex trading boils down to the use of synergistic tools: in equal shares there is a purchase of one asset and a sale ("short") of another. To determine the moments of entry into and exit from the position, the term is used as the value of the moving average with a period of two hundred (based on the price spread). It is perceived as one of the most important auxiliary tools of successful traders - active participants of the stock market. Currently, the shares of companies supplying energy resources to the international markets (mainly oil and gas) are chosen as pairs. For more information about pair trading can be found on website.

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