A Revolution in Pairs Trading

This strategy will turn pairs trading on its head.

During the 1980s, a group of analysts working for Morgan Stanley struck gold with a new strategy called pairs trading. The goal is to match two highly correlated equities, trading one off against the other. When their prices diverge, the trade is entered. If the pair reverts to its mean trend, a profit is made on one or both of the positions. (Financial institutions  have kept this strategy away from the vast investor public.)

The pairs trade is market-neutral, meaning the direction of the overall market does not affect its profit or loss. The pairs trade is also hedged. This is because the price movement of one equity offsets the other. These properties make this strategy low risk in any type of market.

We have developed a new strategy, called the Counter-Condor, which extends the pairs trading idea to inversely correlated ETFs.

Pairs trading suffers from one weakness. Over time, the pair’s correlation may weaken. Counter-Condor bases its trades on leveraged inverse ETFs. These pairs are adjusted daily. This daily procedure maintains an inverse correlation of -1. That’s a degree of perfection never met with equity pairs.

Here are some of the characteristics of the Counter-Condor.
1.    It trades inversely correlated ETFs, such as TNA and TZA.
2.    Over 85% of the trades are profitable.
3.    Profits per trade, ranging from 25% to 150%, are not unusual.
4.    The strategy is allowed in IRAs.
5.    The strategy profits whether the market moves up or down.
6.    Because of the inverse correlation, the price change of one ETF offsets the other.
7.    Unlike the classical pairs trade, the Counter-Condor does not short stocks.
8.    Historic testing demonstrates low draw-down.
9.    This is the ideal “Couch-Potato” strategy; once the trade is put on, lay back and relax.

Join our free webinar, September 23 at 7:00 PM to learn more about the Counter-Condor strategy. Questions will be encouraged. Sign-up here.

Article Tags: Pairs Trading

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