Q&A by Don Bright
I read Stéphane Reverre’s article “Pairs Trading” in the March 2001 issue, and I have a few questions. Do your traders employ this strategy? How is it best implemented? How do you pick the two stocks to trade? How do you determine which one to buy and which one to sell?
— Matt, Las Vegas
We have been employing this strategy in one form or another for decades. We try to find two stocks in the same sector or group (such as tech, oil services, airlines, and so on). We then overlay the two prices back about six months to see the actual price differential. Actually, our Redi-Plus has an indicator on price difference that charts the closing prices for you. Based on this information, you can determine which stock to buy and which one to short.