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Hi Chuck,
Saturday, April 19, 2003, 6:56:52 AM, you wrote:
CR> MessageI'll have a go at defining pairs trading for you.
CR> To me, there are two different kinds of pairs trading (fundamental and
CR> technical).
CR> Before I get into that, however, I'll start by telling you that pairs
CR> trading is NOTHING MORE than buying one stock and shorting another.
CR> Usually, the dollars invested would be the same for each stock.
Pair trading is one of my bread-and-butter systems. But I don't
invest the same amount of yen in each issue, ever. I buy and short
the same number of shares.
The pairs I use are always in the same industry, and usually pairs
that are very close to each other in terms of ranking in that
industry. Then, it's simply a waiting game, watching for the price
anomaly between the two issues that is virtually certain to arise.
I chart these based on both absolute price differential, and
percentage price differential. When triggered, these trades produce
some of my biggest profits, and often over surprisingly short time
frames. They don't trade very often, which is their only drawback,
but they can fatten your wallet in a big hurry, and of course with
substantially less risk than straight long or short positions.
To me, pair trading (and the observations I've had while doing it) is
the easiest evidence to refute the contention made by some that the
market is somehow efficient (if the recent bubbles in Japan and the
US didn't already disabuse anyone holding this silly notion). This
'efficient market theory' is an absurd contention to anyone that has
observed pricing phenomena between closely ranked companies in the
same business. I'm not talking about situations where there is a
radical change in the fortune of one company vis a vis the other,
either. I'm talking about mature businesses where the value of
company A simply oscillates over the years between 101 percent of the
value of company B and 150 percent of the value of company B. I have
pairs that make this round trip again and again, every few years, or
less. It just takes observation, and patience.
Best,
Yuki
mailto:yukitaga@xxxxxxxxxxxxx
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