New Pair Trading

Conventional pair trading finds two ideally closely correlated stocks. The tracking one of them predicts what trend the other could go. It had achieved huge success in the past. The main problem for practioners, however, is that it is not easy to sift out closely correlated stocks among thousands of listings. It is somehow manageble doing within sections or industries. But it is still a mounting job.

With the help of bearish ETF, a new pair trading can be devised so that the search job becomes easier. Any bearish ETF can find its counterpart in the bullish side. Therefore, the search work almost vanishes as long as you fix your investing field. For instance, financial ETF is under banish while bearish financial ETF boom. This essentially hedge trick propel an implementation of pair trading. Of course, the exactly anti-correlated feature could be used for prediction too. It is better off using it as hedge purpose rather than prediction (see figures).

The problem left out is how to pick what ETF pairs to start. For current knowledge, volatility is the main indicator.