JUST AN OBSERVATION/FEEDBACK (individuals may or may not agree)! BUT this is generally followed everywhere!
never get into a pair trade when:
still there are many reasons. but i cud figure out the relevant ones over here. now the question ppl will ask is - the universe becomes small basis these above conditions & thus the opportunities. well IT IS! but u have to live with that specially in the mkt like india!
never get into a pair trade when:
- result season is ON or one of the stock's result is pending!
- any one of the stock is at the mercy of FIIs (e.g. HDFC Bank)
- stocks not from the same sector and not closelt related in terms of business model (e.g nifty+gold). GULUGULU - dont get me otherwise on this. but still cudnt figure out wt ws the reason? ws it that all the criteria were matching in PTF?
- value terms are not matching. here if there is a difference, then one can buy stocks in cash to nullify deviations!
still there are many reasons. but i cud figure out the relevant ones over here. now the question ppl will ask is - the universe becomes small basis these above conditions & thus the opportunities. well IT IS! but u have to live with that specially in the mkt like india!
But as you people know, the divergence within a pair (that is needed for this strategy) can be caused by
1) Temporary supply/demand changes,
2) Large buy/sell (FII) orders for one security,
3) Reaction for important news about one of the companies (Earnings etc), and so on.
What I mean to say is in most of the times, this FII, Earning results helped these pair to converge from there divergence and made it again a perfect “PAIR”.
If you are looking,
BANKBARODA- PNB or
BANKINDIA- CANARABANK
Recent earning results and other news, helped these pairs back to its convergence zone or otherwise it would have write off from the pair trading book.
I think it’s better, small investors to stay away from entering pair, when there are events highlighted by Malgohft. Those who have enough money to average the position will make good profit in these scenarios.
Happy pair Trading!!!!