Pair Trades
EquitySponsored Content

Curriculum Content
Pair Trades involve both long and short strategies, both executed together. Pair trades are relative to each other, long on a firm with an optimistic outlook, short on another firm with a pessimistic outlook. Exposure levels do play into the trade. If you think that the short trade’s price will depreciate more than the price appreciation on the long side, more money should be placed into the short side trade. If you think the long trade will price appreciate more than the short side’s depreciation, you should place more money into the long side. The bias here is towards the two specific firms involved in the trade. The bias is not explicitly supposed to be based on the market, but it can be if you anticipate major market movements upwards or downwards.
Each trade must be logical on its own and interwoven into the other for it to qualify as a pairs trade. You should justify your trade on the movements of fundamentals, ratios, and events. This is especially true for the short side, since shorts have theoretically endless risk and can easily turn against you if an acquisition or merger is proposed.
The relativity of the two trades should be direct and explicit. Pair trades typically occur between two firms within the same industry. If “Great cell Corporation” is encroaching on the market share of “Bad-phone Incorporated” with stronger substitute products while maintaining stronger financial fundamentals, the pair trade would be long on “Great cell Corporation” and short on “Bad-phone Incorporated”. This would be especially true if Bad-phone’s fundamentals were rapidly deteriorating.
Pair Trades can also occur across industries. If the development of a new technology is phasing out an older technology, it can be sensible to long the new technology leaders. At the same time, the firms who are strategically centered on providing the old technology would be the short side trade. As smartphones became popular, personal digital assistants (also known as Palms or PDAs) fell out of popularity. The features in smart phones incorporated all of the features of PDAs, and consumers no longer had to purchase cell phones and PDAs separately. Firms which exclusively made PDA devices and did not convert into smartphone markets were annihilated in the marketplace. Logical pair trades short sold PDA device manufacturers and purchased smart phone manufacturers.
The same occurred for developers of typewriters as personal computers and word processors appeared. The new features of saving, loading, and copying removed any need for manual typewriters. Any manufacturer that focused almost purely on typewriters found their market shares eroded over the course of decades, not by a competitor but by an entire new industry replacing them. The pair trade for this situation would have traded long on Word Processing developers and short on typewriter manufacturers. Both of these examples indicate you can learn to identify trends that will erase current services and products in favor of more convenience. You should short sale shares most likely to suffer from the trend and long buy shares most likely to benefit from trends. Identify both by their fundamentals, ratios, and events surrounding the two firms.
Did we help you? Vote with a Crypto-Donation!
Visit on Steemit!
Support us on Steemit!

Donate Bitcoin
141FSmuHkMSZVsQQtE9GHSPyj6gAonqqWR

Donate Dash
Xr4fdtP78Mh3gnVwAUjjuZRCq3kubaHZ5o

Donate Litecoin
LcrxGsshB2j9SddnZNdLfYMsDqAtw3Dr9v

Donate Iota
LXIVNBVHRYBOHRWNGMBNHOYMT9GBEFTPQMKDUZUYYHGMPXOOEYETMUQZXWXCGWBMTFERLW9LMCKNUDCKAMDOQCNDNZ
Visit on D.Tube!
Support us on D.Tube!

Donate Bitcoin Cash
14NCVeGCZfHf7tiy9N2Yz1mrBNi9m2mQ4S

Donate Ethereum
0xAF7d66B09F34833Ccec1Ed9e4D356D40c09698e5

Donate Ripple
raiZ2rCXLeBTUh2A4voKALZpMxQ88KxZxm

Donate Monero
42byh9AjzB3XXRptSeSfzAGC588HRZgVXAGMay6yYKjjAHinUxdQkxw3Ay1XcziXV86XY57aRqG5kGnJ8LFWmSjmAnUEnYh
International Economic Analysis:
- Major Currency Economic Summaries
- Performance of Major Imports and Exports
- Mandates of Central Banks versus Expectations
- Performance Indexes of Major Economies
- Economically Correlated Currency Projections
- Large Funds Currency Sentiment Readings
- List of Technical Indicators to Look For
- Occasional: Foregin Exchange Technicals Markups
American Markets Analysis:
- Summaries of American Economic Structure
- Performance of Major
- Imports/Exports
- Federal Reserve Mandate versus Expectations
- Performance Indexes of U.S Economy
- Economically Correlated U.S Dollar Projections
- Large Trading Fund Index Sentiment Readings
- Market Wide Earnings Versus Valuations
- Fundamental Ranking of U.S Business Sectors
- Best and Worst Future Consensus Estimates
- Occasional: Firm Fundamental Strength Report
- List of Technicals to Look for While Trading
Storefront
Investment and Finance, Serviced by Amazon
No Results Found
The page you requested could not be found. Try refining your search, or use the navigation above to locate the post.