Pairs Trading tool is another amazing tool provided by Stellar Finance among its panoply of tools. But how can traders like you benefit from it ? You will discover how to use it, and what are the key consideration while using it:
What is Pairs Trading?
Since its advent, this trading tool gained popularity among traders willing to have a challenging experience. Providing higher chances to win your trades if the markets are in your favor and you took sufficient time to study the different opportunities.
Unlike other trading tools, Pairs Trading allows traders to trade on two different assets within the same trade position. One main difference is the fact that, traders have to predict the performance of the two chosen assets rather than their future price.
How to make optimum use of Pairs Trading?
As we mentioned, this trading tool requires traders to trade two correlated assets and see how they perform against each other. For instance, traders can choose gas and crude oil as these form part of the same asset array, in that specific case, Commodities. If your selected pairs deviate from each other, this can result in trading opportunities.
To begin with Pairs Trading, traders should take to the following steps
Select your two competing assets
Select two underlying assets within the same asset array. For instance, traders can opt for assets pairs such as Google Inc and Apple Inc (Stocks) or Gold and Silver (Commodities)
Choose your investment amount
The investment amount for Pairs Trading usually starts as from 25 and it can go up to 3000. It is interesting to note that Stellar Finance offers payouts which can reach up to 75% depending on the market fluctuations.
Choose your expiry time
Similar to trading with other tools, it also requires you to select an expiry time. This usually starts as from 30 minutes.
Decide which asset will perform better
As we said earlier, Pairs Trading doesn’t require traders to predict the future value of an asset. Instead, traders should seek to know which asset will perform better than the other one.
For example, If a trader’s selected pair consists of Oil and Gas, he/she must decide which of these will perform better and vice versa. In case the trader believes oil will perform better at the expiry time, then he/she should place a “Call” option.
On the other hand, if the trader believes Gas will under-perform at the expiry time, he/she should place a “Put” option.
Competitive edge of Pairs Trading?
Below is a list of reasons, why using this particular tool can benefit every trader using it.
(1) High Payout: Payout percentage can reach up to 75% according to market fluctuations.
(2) Return on Investment: Traders can still benefit from high returns on investment even if the market keeps fluctuating.
(3) Simple to use:Pairs Trading is relatively simple to use provided you made sufficient research on how to use this tool and take required time to master it.
(5) Low correlation to the market averages: The net position of the asset may remain neutral due to low interaction with the market fluctuations.
Our advices to trade with Pairs Trading Tool
While trading with this type of tool, traders should know about the various fundamentals which can lead to proper decision. Here are our advices for traders using this tool.
- We highly recommend traders to carry out fundamental analysis to see how events actually affect the overall performance of the chosen assets. For instance, traders can consider Changes in operating margins, Discounted cash flow and Dividend discount.
- Many traders using Pairs Trading on a short term basis prefer to use technical analysis as an efficient way to analyse the market and trade.