$Gold vs $Silver $Pairs Trade

$Gold vs $Silver $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 $Gold $GC vs $Silver $SI.

Here is the monthly chart.   The chart shows that Gold vs Silver started a bullish trend mid 2014 with Gold getting stronger than Silver.    June 2015 this bullish trend ended and the charts went through a major pull back with Silver being stronger than Gold.    April 2017, the major pull back support held and price started to go put establishing Gold being stronger than Silver again.    With the month closing, we closed above the Green resistance which is the confirmation that a possible bottom has been established.    We have to refer to the weekly to see if a bullish trend can occur on lower time frame to retest the high or if the pair relationship will consolidation.

 

Below is the weekly time frame. It has a bullish setup with swing/long support.    Therefore, we are going to look to enter this pairs trade on the breakout entry.    Once price gets to the blue dots (breakout entry), we will look to go long on Gold and short on Silver keeping the risk the same on both trades and keeping a reward/risk of 3:1 on both trades.

Update on $XLK vs $XLF:

Below is the monthly chart.    We placed an alert at the major resistance which never triggered.  Instead price held the minor resistance and went down.  At this time, we are in a consolidation pattern.  We can’t look for a bullish trade until the major resistance is broken.  We can’t look for a bearish trade until we get a bearish setup.    Therefore, there is nothing to do on this trade at this point.

 

Update on $UNH vs $CI:

2 months ago, we posted a possible setup for $UNH vs $CI.    Below is the chart.     We have been waiting for the resistance to be broken and that still has not occurred yet.

 

Update on $BA vs $LMT:

Below is the weekly chart for the $BA vs $LMT pairs trade.   The trade closed out with an average of 2:1 reward/risk.    For the BA vertical trade, 3:1 was achieved but the LMT went to zero.   Since the risk was same on both spreads, we averaged a 2:1 in total.

You can look at previous article on details for the vertical spread,etc.

We will look for another pairs trade on the next pull back.

 

 

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For educational purposes only. Commodity Futures Trading Commission, Forex, Futures, Equity and Options Trading has large potential rewards, but also has large potential risk and may not be suitable for everyone. View our full risk disclosure: https://www.ichimokutrade.com/c/disclaimer/

 

About the Author Manesh Patel