Pairs Trading: A pairs trade is a trading strategy that involves matching a long position with a short position in two instruments (stocks, commodities
, inidces etc) with a high correlation. It is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. The strategy monitors performance of two historically correlated securities. When the correlation between the two securities temporarily weakens, i.e. one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the underperforming one, betting that the "spread" between the two would eventually converge. The divergence within a pair can be caused by temporary supply/demand changes, large buy/sell orders for one security, reaction for important news about one of the companies, and so on. On the local market examples of pair trades include Long Shoprite/Short Woolworths or Long Anglo American/Short Sasol.
Pairs Trade Idea: Long Shoprite/Short Woolworths - In the short term, SHP
appears excessively oversold vs WHL
. On Friday, the RSI
closed at 13, the lowest level since 2003 (as far back as the chart data goes). This pair (Long SHP/Short WHL
) could be a mean reversion opportunity in short term.