$JPM JP Morgan vs $COF Capital One $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 $JPM vs $COF.
Last month, we setup for a Bullish Long term Pull back trade on $CAR vs $HTZ. The monthly chart is very bullish and has been going through minor pull back.
As a result, we are looking for a pull back on a lower time frame. The only timeframe we can see a possible trade is 240m. It is an aggressive trade since we are trading the bearish pull back on the 240m.
Here are the November seasonal patterns for both instruments provided www.alerttrades.com
Update $C vs $JPM:
Below is the daily time frame. Below is the chart setup from last newsletter.
Here is the current chart. The trade was exited when black over extended dots appeared. We did not get to the 3:1 reward but we got 2:1.
Update $EEM vs $SPY:
Below is the current pairs trade chart for $EEM vs $SPY on the weekly time frame. Below is the chart from last newsletter.
Here the current chart. The trade was exited when black multiple time frame crosses developed above price to act as a major resistance.
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