As with anything we try to do in trading, we attempt to buy the strongest looking prospect and sell the weakest looking prospect. In pairs trading however, we do the above on two highly correlated securities.
The idea is to look within sectors, correlated currency crosses, even correlated commodities, and identify the best looking prospect for a long and the best looking prospect for a short. Then we will look to execute a long and short trade respectively at the same time.
The idea is that each trade will provide a natural hedge against the other. We are not so much interested in the performance of each position in isolation, but rather the performance of each position as part of a single, combined trade.
Let’s look at an example.
One of the best ways to do a pairs trade is to look at a specific sector in the market, let’s say the Healthcare Sector (XHJ). We note two stocks in the XHJ that are experiencing very different fortunes in the market.
CSL Ltd (CSL) is in a nice uptrend, whilst Cochlear (COH has endured a rough time over the past five months.
This would be an option for a “pairs trade”. We would look to go long the stronger stock (CSL) and simultaneously go short the weaker stock (COH).
To read more visit Carl at the Australian Stock Report How To Buy Shares blog
October 15, 2013
October 1, 2013
Buy, Sell, Hold Recommendations 29/9/2013
As featured in the Herald Sun on September 29th 2013, here are the latest buy, sell and hold recommendations from Geoff Saffer Equity Analyst & Educational Facilitator at the Australian Stock Report.
Australian Shares To Buy
Lend Lease (LLC) – Expect LLC to build on solid FY13 performance, underpinned by strong project pipeline, infrastructure activity. Balance sheet allows for possible acquisitions.
Empired Ltd (EPD) – Expanding IT Services company looks set to continue fast-paced growth on back of recent strategic acquisition. Expect earnings to almost double in FY14.
Australian Shares To Hold
Medusa Mining (MML) – We remain wary of the gold sector, but MML’s production is now ramping up, costs remain extremely low and valuation is more appealing than its peers. Australian
Agricultural (AAC) – Has just undertaken a massive capital raising, shoring up its balance sheet. Needs to successfully shift sales overseas to achieve higher beef prices.
Australian Shares To Sell
SCA Property (SCP) – Property trust offers solid yield and surety of Woolworths tenancy. But more than offset by lack of growth and underlying weakness in specialty store occupancy.
Oroton Group (ORL) – Has some growth prospects, but lucrative Ralph Lauren contract has ended, highly-regarded CEO has left and stock trades at too high a premium to sector.
Australian Shares To Buy
Lend Lease (LLC) – Expect LLC to build on solid FY13 performance, underpinned by strong project pipeline, infrastructure activity. Balance sheet allows for possible acquisitions.
Empired Ltd (EPD) – Expanding IT Services company looks set to continue fast-paced growth on back of recent strategic acquisition. Expect earnings to almost double in FY14.
Australian Shares To Hold
Medusa Mining (MML) – We remain wary of the gold sector, but MML’s production is now ramping up, costs remain extremely low and valuation is more appealing than its peers. Australian
Agricultural (AAC) – Has just undertaken a massive capital raising, shoring up its balance sheet. Needs to successfully shift sales overseas to achieve higher beef prices.
Australian Shares To Sell
SCA Property (SCP) – Property trust offers solid yield and surety of Woolworths tenancy. But more than offset by lack of growth and underlying weakness in specialty store occupancy.
Oroton Group (ORL) – Has some growth prospects, but lucrative Ralph Lauren contract has ended, highly-regarded CEO has left and stock trades at too high a premium to sector.
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