Pair Trading Strategy (Positional)

Volatility has become the hallmark of financial markets. We see benchmark indices posting decent gains in one trading session and lose those gains in other trading session. In such a scenario, traders and money managers can adopt a market-neutral strategy called pair trading, which is very popular with hedge funds, investment bankers and professional money managers

It is market-neutral strategy as its profitability is not dependent on the direction of the market. It yields profits whether market moves up or down, or remains sideways. Also, risk in this strategy is very low.

In 1980s Gerald Bamberger popularized this strategy.

The strategy monitors performance of two historically correlated securities in same sector or industry. In simple terms pair trading involves buying one stock and simultaneously selling another stock in same industry that follow each other when they diverge from the normal pattern; with the expectation that the normal pattern will soon resume.

For instance, let us assume that Infosys and Wipro are correlated. It means most of the times these two scripts move in tandem with each other either in upward direction or downward direction.

Sometimes due to different reasons, their correlation breaks they behave abnormally by moving in different directions. This movement gives an opportunity to trade.

If Infosys has outperformed then initiate short positions and simultaneously create long positions in Wipro. Eventually, the outperformer has to correct and the underperformer has to catch up. When the price ratio of the two scripts converges, book profits. In this fashion you can make money from pair trading.

As you know Banknifty index is highly volatile and its highly risky to trade in index. Hence, We have introduce a pair trading strategy for banking stocks only. In which one has to buy one bank stock and sell another bank stock simultaneously and thereby one is not bothered about whether banknifty will go up or down or sideways…

This is pair trading in its most simple form. It's not a fool proof method. Traders can and do lose money if stop loss is not followed. However pairs trading are a proven method for consistent profits.

NOTE:
1. More instructions for pair trade is given under tab 'FAQ'.
             http://justbanknifty.blogspot.in/p/faq_8.html

2.Whenever the recommendation is generated it will be posted here and also the follow up post for booking profit or stop loss triggered will be given. Detail of its trade diary will be given under tab 'Pair Trade Diary'... 
          http://justbanknifty.blogspot.in/p/banking-stocks.html