Pair trading is when a trader matches a long position and a short position in a pair of highly correlated stocks, commodities or currencies. Pair trading is a strategy that matches a long position with a short position in correlated stocks, commodities, currencies or options. This strategy allows traders to trade more risk-free and is often called neutral market trading.
Below are some benefits of using a pair trading strategy:
Profit in different market conditions
This strategy does not depends upon the market movements, it only depends on the the relation between the two stocks/commodities/currencies.In other trading strategies long traders gets benefited when market is rising and short traders are benefited when market is falling.For pair traders market direction is no matter of concern, only the stocks or commodities which are part of pair determines the outcome of each trade. This is the best part of pair trading.
Limited risk
Pair trading is risk-free and predictable. This strategy involves matching a long position with a short position in similar stocks or commodities. This creates a hedge that is controlled and limited.
Predictable
Two commodities, such as gold and silver, can be predicted by traders. If they have a good historical correlation, they will either converge again after a divergence or not. This strategy requires that traders choose the best pair from all of them.
The market’s volatility is no longer an obstacle
Market volatility is a reason traders often avoid trading in it. Pair trading is your friend. It can be difficult to manage market fluctuations. Trades that see prices diverge or converge often offer traders great opportunities to make a profit.
This strategy is best for traders who have a lot of market knowledge and are experienced. Mcx tips are a great way to get more positive results in commodity pair trading. There are also some drawbacks that traders need to be aware of, in addition to the previously mentioned advantages. This strategy doubles the fees and commissions. Normal trading strategy fees are paid once, but this strategy will charge twice as much. To identify correlated pairs that could offer great trading opportunities, you need to do thorough research and interpret the results.