$CAR Avis vs $HTZ Hertz $Pairs Trade. One of the hidden strategies most people don’t talk about is “pairs trading”. Some people talk about it but still the concept is not done right. I learned this powerful strategy in the institutional world.
What is pairs trading? Pairs trading is a hedge based strategy. The goal is to trade one instrument and hedge with another instrument. For example, if you like to trade Apple stock, you buy that instrument. To hedge it, you should sell their major competitor. As long as you limit your risk and make sure you get a 3:1 ratio, you will make money. This strategy is executed every quarter so it starts to create a “residual” income every quarter.
The key is to make sure at least one of the instruments move in your direction. To do this, we use technical analysis to determine the following:
- Which/When instrument to buy
- Which/When instrument to sell
This month, we are looking at $CAR vs $HTZ. The Monthly chart is shown below. There is no multiple time frame support at this time due to the price action it has been undergoing for this year. However, it is a monthly support now. Therefore, we are going to take an aggressive trade and look for entry now. Below is the chart setup.
Update $C vs $JPM:
Below is the daily time frame. The breakout level got triggered and this pairs trade entered. The current stop is the current green dots on the chart. The risk has drastically been reduced from 0.72 to .74.
Update $EEM vs $SPY:
Below is the current pairs trade chart for $EEM vs $SPY on the weekly time frame. From entry to high, price went 4.26% and then decided to pull back. The major resistance is at 7%.
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