timwest

PAIRS TRADE - DVN vs XOM

NYSE:DVN   Devon Energy Corporation
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4
Here are the raw basics on this strategy (see red type):
#1. Find two stocks that correlate
#2. Decide on some rules in advance so you don't hang onto losers.
#3. Keep risk on any trade to 1% of your portfolio or less. If you don't know how then I can create some charts to show you how.
I highlighted in BLUE CIRCLES when there were periods when you could have bought the lagging stock and shorted the outperforming stock. You will see this latest decline in DVN appears to be a watershed wipeout of DVN stock holders. Someone was bailing out, but now it appears they are out of the way. (See the chart I produced on DVN earlier tonight).
Note that this PAIR can RESOLVE AT A PROFIT in basically three ways. The key is to make money OVERALL and not on each position. The point is to avoid another "crash" where you might be stuck long and suffer at 10%-20% loss overnight in the market. Cheers!

By: Technical Tim 12:21AM EST Nov 18, 2011
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Comments

Further comments: It would be prudent to go back and understand exactly why each
stock has performed the way it has to help you define your risk. Otherwise, keep risk to 1% of your portfolio Why? Because you never know in advance which trade will work.
Let's make some assumptions:
#1. 50 trades a year with this methodology:
#2. If they are 75% winning trades
and if your winners are 2% and your losers are 1%,
then your return at year end will be 75%.
This will require massive portfolio margining, by the way,
to get all of these positions on. Cheers.
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