What is Pairs Trading?
The general concept of pairs trading began in the 1980s when a group of math experts figured out that you can make money by "pairing" two securities that trend in the same direction over a period of time. You patiently wait for them to stray somewhat from their pattern and then enter a trade that anticipates that the pair will converge back. When the pair converges back, you then close the trade for a profit.
Pairs Trading is typically performed with two stocks in similar industries as these stocks often move in similar directions. It is also frequently performed with currencies and is also used as a tool to determine trends and direction in virtually all markets.
What are the Advantages of Pairs Trading?
Pairs Trading is an excellent way to make money in the markets while at the same time protecting you against market downturns. Some call it a Professional's "best kept secret" because Professional Traders have been Pairs Trading for years with great success. Pairs Trading can also generate a consistent revenue stream and also beat many if not all of the market's key benchmarks on a year-in year-out basis. While its a little more complicated than just buying and selling an individual stock, it is less risky and often more lucrative. Unlike buying a stock and letting it run for a while, Pairs Trading requires both your time and attention to manage your positions and execute trades. Professionals know well that this is time worth spending, and for individual and retail traders it often amounts to a decision to learn a new style of trading.
While PT Professional has been designed as a tool for Professional Traders, Keyon believes that its streamlined design makes it simple and effective for individual and retail traders to begin trading pairs.
How do I Pair Trade?
After understanding the general concept of Pairs Trading, trading a pair is simple. With stocks, when the right time occurs and the pair has strayed (i.e. diverged) to a certain point from its typical pattern, you buy the stock that has had the weaker movement of the two and sell (short) the stock that has had the stronger movement of the two. When the pair converges back, you close your position by selling the stock that you had bought and "buying to close" the stock that you had sold short. By doing so, you win the trade by capturing the pair reverting back to its normal pattern (often called "reverting back to the mean").
PT Professional is designed specifically to fill the two key needs to help you trade pairs - it identifies the best pairs to trade and provides optimal time to open and close your pair positions.
How do I sell a stock short?
Selling a stock short is a common practice amongst professional traders today. As an individual or retail trader, you need to have permission from your broker to do so. In addition, shorting a stock requires that you "borrow" available stock from your brokerage firm's inventory. Once you have the privilege and available funds to do so, selling a stock short can be as simple as buying a stock and most brokerage firms allow you to do it through the same tools.Â Please contact your brokerage firm for more details.
Does PT Professional provide order execution?
PT Professional is designed as a tool to identify the best pairs and to provide optimal entry and exit points for your trade. We at Keyon feel that order execution is best performed between you and your brokerage firm, as brokerage firms specialize in the many different types of orders and focus on executing those orders for the best possible price. PT Professional's notification engine provides the detail to allow you to setup your trade, including a ratio factor that let's you easily calculate how many shares to buy and sell.
How often does Keyon provide stock recommendations?
Timeframes for recommendations can vary widely and depend on market, sector, individual company and even geopolitical factors. At Keyon we are more deliberate in assessing these conditions and tend to send fewer announcements out than other firms. Timing is often crucial for crafting and announcing a recommendation, and so we prefer to only provide data to our customers when we feel the right time occurs.
I'm interested in learning more about Hedge Trader. Can you tell us more about this product and when it will release?
We are very excited about the upcoming release of our Hedge Trader product as we will have a new product that a large audience of retail and institutional traders can benefit from.Â Hedge Trader is in some ways similar to our PT Professional platform in that it also focuses on protecting your risk while generating strong returns. As we are still in the development phase, we will be providing more information as the product progresses through the cycle. We plan to announce a release date in the mid-summer timeframe and are currently targeting a release date for the fall of 2015.