$C Citibank vs $JPM JP JMorgan $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 $C vs $JPM. The weekly chart is shown below. In this situation, the chart has a bullish setup due to the green shaded area. This means $C is more bullish right now vs $JPM. This week, a major support developed for this pair with the black cross. This is supporting the possibility of a breakout.
We can’t do a pull back trade because the reward/risk with the green dots as our initial stop would be bad. As a result, we are looking for a breakout trade at the blue dots. The breakout trade on the weekly will not give us a good reward/risk at all! The risk is bad on the weekly time frame because price has been consolidating at the top of the range. When this happens, the only thing you can do is a breakout on the daily timeframe.
Below is the daily time frame. The consolidation pattern on the weekly definitely caused the risk on the daily to be lower. As a result, the reward/risk was good for a setup.
Update $EEM vs $SPY:
Last month, we stated the following: “the blue lines show the major support and resistance. If the resistance is broken, we will looking at going long on $EEM and short $SPY. If the support is broken, we will go long on $SPY and short $EEM”
The pairs broke the resistance. Below is the weekly chart for $EEM vs $SPY. From the break of the resistance to the next resistance is around a 7% move. With options, this allows a 3:1 reward/risk ratio. Once the next resistance is reached, we will evaluate to take the pairs position off or take 50-75% positions off and tighten stop.
Update Gold vs Silver:
Last month, we stated the following; ” As a result, we had to wait for a pull back. We got a pull back to the blue line. At that point, we place option trades (calls) for Gold and puts for Silver. The next major resistance is marked at 80.30″
The trade got the closing price of the pivot high but didn’t reach the pivot high as we wanted to achieve a 3:1. We had to exit at close to break even when the black crosses developed as a resistance.
Update on $UNH vs $CI:
Last month, we stated the following: We have been waiting for a setup for this pair and we finally got one. Below is the weekly chart. Price has been consolidating in the cloud. However, we finally got a multiple time frame support. We took the pairs trade with options at the blue line support for a bullish trend continuation. The trailing stop is the green dots. Preserve mode is the reward/risk tool.”
We entered the trade on the pull back at the blue dash line. However, we had to exit for a small loss because a black cross resistance developed.
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