Pair Up to Define Your Day Trading Strategy - dummies

Pair Up to Define Your Day Trading Strategy

You need a trading strategy before you start day trading. In the pairs trading strategy, a trader goes long a strong stock and short a weaker one in the same category. The idea is that in an up market, gains on the long will outpace losses on the short, and in a down market, gains on the short will outpace losses on the long.

A pairs trader looks for two related assets and goes long on the stronger one and short on the weaker. Many pairs traders work with stocks and look for two companies in the same industry, but a pairs strategy can be worked in futures and currency markets, too — going long on metals and short on interest rate futures, for example, or long on the dollar and short on the euro.

The idea is to get the maximum return possible from a trend that affects both assets. For example, if one retail stock does really well, it may be because the company is taking market share from a weaker one. These trades are a little more complex because you have to plan both sides.

The key is finding a strategy that fits your temperament and style so that you can act on it. A strategy is only as good as the trader who executes it.