ETFs Pair Trading Strategy
Pair trading of Exchange traded funds (ETFs) is a less explored ETF trading strategy, which can be used to profit from any market condition. Find out more about pairs trading strategy. It is a market neutral strategy with less downside risk. The first step in pair trading is finding two related ETFs, that is, ETFs which move in the same direction most of the time. Here are some ETF pair trading opportunities.
US & International markets – Today all major international markets move almost in the same direction. Thus a US market tracking ETF and an emerging market tracking ETF can make a good pair, because emerging markets show greater volatility. In a downward market, the trader can buy a US market tracking ETF and short an emerging market tracking ETF. If the US ETF loss is 5%, the emerging market one loss can be 8%; thus one can profit 3%.
Traditional and Smart ETFs – Smart ETFs try to magnify any market movement. Thus short term pair trading of traditional and leveraged ETF tracking same (related) indexes can work. In a bullish market if traditional ETF can gain 3%, a smart ETF can gain double. Thus shorting a traditional ETF and buying a smart ETF can result in a gain of 3%. Other possible pairs include ETFs tracking large cap and small cap stocks, ETFs tracking related currencies, ETFs tracking two related industries/sectors/exchanges, and trading an ETF and stocks included in that ETF portfolio.
The success of ETFs pair trading strategy depends on 1) finding the right pairs with tight correlation, 2)successfully predicting market direction (for taking the right long/short position), and 3)limiting your trading costs (by taking big positions or by trading through a discount broker).
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US & International markets – Today all major international markets move almost in the same direction. Thus a US market tracking ETF and an emerging market tracking ETF can make a good pair, because emerging markets show greater volatility. In a downward market, the trader can buy a US market tracking ETF and short an emerging market tracking ETF. If the US ETF loss is 5%, the emerging market one loss can be 8%; thus one can profit 3%.
Traditional and Smart ETFs – Smart ETFs try to magnify any market movement. Thus short term pair trading of traditional and leveraged ETF tracking same (related) indexes can work. In a bullish market if traditional ETF can gain 3%, a smart ETF can gain double. Thus shorting a traditional ETF and buying a smart ETF can result in a gain of 3%. Other possible pairs include ETFs tracking large cap and small cap stocks, ETFs tracking related currencies, ETFs tracking two related industries/sectors/exchanges, and trading an ETF and stocks included in that ETF portfolio.
The success of ETFs pair trading strategy depends on 1) finding the right pairs with tight correlation, 2)successfully predicting market direction (for taking the right long/short position), and 3)limiting your trading costs (by taking big positions or by trading through a discount broker).
NobleTrading.com Offers Online Stock Trading, Online Options Trading
Online Futures Trading, Online Forex Trading
Worldwide Brokerage Service, Day Trading Brokerage
posted by NobleTrading at
8:51 AM
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