Introduction to Dollar-Neutral Pair Trading

Dollar-Neutral Pair Trading entails establishing simultaneously both a long and short position in two stocks with each position having the same absolute dollar amount. This strategy seeks to generate significant and consistent returns while controlling risk by maintaining a low correlation to broader market averages. This market-neutral strategy is meant to profit regardless of whether equities rise or fall.

You can easily evaluate a pair trade by selecting two companies with similar characteristics and then using the Catalyst Corner Pair Trading Model to determine if they are trading outside of their historical trading range. Typically an investor will buy the oversold issue and short sell the overbought issue the goal being for the spread between the two equities to retrace to their historical trading mean. You can profit by either the long increasing in price, the short decreasing in price, or both. Losses result from diverging prices of the paired securities.

Enjoy the e-book which is educational and insightful and provides examples of pair trades and a free pair trading tool to help you get started! Good luck.