A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Dipping Your Toes Back in the Water
01/12/2009 10:50 am EST
Trying to identify the bottom of a bear market is next to impossible. Luckily for you, when you implement a pairs trading strategy, you don't have to know exactly where the bottom is before you start putting your money back into stocks.
As you will see in the Easing Back Into the Stock Market with Pairs Trades video linked below, you can reduce your risk when you look to trade stocks in pairs instead of individually.
Pairs Trading Can Reduce Your Risk
Pairs trading—buying one stock and simultaneously selling a similar stock—is a great way to get back into the market without taking on too much risk up front.
For instance, if you see a stock—Home Depot (HD) for example—that you believe is going to be moving up in the near term, but you are still nervous about the performance of the overall market, you can find another similar stock—like Lowes (LOW)—to sell simultaneously.
If the market goes up, you should make money on your Home Depot trade, which is a great thing. However, if the market goes down and you lose money on your Home Depot trade, you should also make money on your short Lowes trade—which should offset most or all of your losses.
Video Lesson: Easing Back Into the Stock Market with Pairs Trades
I've scratched the surface of this topic in text above, but I go into much more detail in the Easing Back Into the Stock Market with Pairs Trades video:
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