Update: Reduce Volatility with this Trading Strategy
Update on yesterday’s trade below:
For those of you who have not read our trading ideas before, we like to pair trade or what is known as a relative value trade in the institutional world.
What is a relative value trade?
#-ad_banner-#A pair trade (relative value trade) is basically an arbitrage, taking advantage of a price difference between two or more markets: striking a combination of matching assets that capitalize upon the imbalance, the profit being the difference between the market prices. This reduces market risk and exposure by neutralizing market beta.
Example of a recent pair trade we put on was long Google (Nasdaq: GOOG) and Short Yahoo (Nasdaq: YHOO). This was a two day trade that resulted in a +2.37% gain vs. the S&P 500 -0.80% loss. As market technicians, we discovered the price divergence between the two and thought it to be a high probability trade.
So what do we see diverging now?
We like the historical divergence of Long CitiGroup (NYSE: C) and Short Wells Fargo (NYSE: WFC). Remember, you must enter the trade together and leave or close the trade together. As you see from the chart below, the spread have diverged too much between the historical price between these two companies.
We recommended going long Citigroup (NYSE: C) and shorting Wells Fargo (NYSE: WFC) around mid day yesterday. Yesterday, Citigroup outperformed Wells Fargo 1% from that time until close. Today CitiGroup is outperfoming WFC as of 10:25 AM EST by 4%. That is 5% since we recommended it yesterday, and now we recommend taking profits.
For more pair trades visit www.thechartlab.com