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Description of Trading Pairs

Pairs trading is an effective trading style that has traditionally been utilized by institutional investors such as hedge funds and savvy individuals who trade for a living. But today, this style has been adopted by a broad range of traders–from the novice to the veteran. With the help of technology and some commonsense guidance, you too can begin using this technique to boost the profits of your portfolio.

Written by Mark Whistler, a licensed securities trader and broker and leading arbitrage expert, Trading Pairs clearly illustrates this profitable technique, and allows you to gain a new perspective on the markets as well as a new approach to investing. In addition, if you have access to the Internet and Microsoft Excel, the companion CD–ROM can help you put everything in this book to practice, as well as track your pairs.

"Mark Whistler has produced the ultimate guide to pairs trading that is a must read for any technical or fundamental market trader. Better yet, he’s done so with a sense of humor that makes for an even better read!"

–Scott Cortelyou

cohost, Business for Breakfast, 760 AM, The Zone, KKZN

Title Information

ISBN:

9780471584285

Pages:

279 pages

Format:

Hardback

Product Code:

18531

Publisher:

John Wiley & Sons Inc

Published:

24/08/2004

Edition:

illustrated edition

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About Mark Whistler

Mark Whistler is a licensed securities trader and broker and leading arbitrage expert. Mark recently worked as the Editor in Chief for a respected financial newsletter and was a guest analyst on a nationally syndicated radio show. He holds a bachelor's degree in finance and art history. He is the key developer of pairstrader.com and can be seen around the country giving seminars on trading techniques, technical analysis, pairs trading, and deciphering economic news. He has contributed to a market show on 760 AM (in the Denver area), and writes a newsletter, The Pairs Trader (pairstrader.com).

Contents of Trading Pairs

Acknowledgments
Introduction

1. The Nuts and Bolts
What Are Pairs?
How Do Pairs Work?
Who Uses Pairs?
Mindset of Reading This Book

2. Why Fundamental Analysis?
Common Sense
China.com
How Fundamental Analysis Relates to Pairs

3. Market Basics
Growth and Growth Ratios
Growth, PE, and the PEG Ratio
Tying It All Together

4. Technical Analysis
Candlestick Charting
Support and Resistance
Trend Lines
Moving Averages

5. Technical Analysis Indicators
Stochastics
Chaikin Money Flow Oscillator
On-Balance Volume
Relative Strength Index

6. Basic Pairs Terminology
Understanding the Correlation
Spread, Differential, and Ratio
Divergence Trading
Convergence Trading

7. Importing Data into Excel

8. Understanding Correlations - Steve Price

9. Correlation Simplified
What Is a Correlation?
Where to Find Correlations
Building a Correlation Using Excel

10. Understanding Stock Correlations in Relation to Indices
Why an Index?
What Is Beta?
How to Apply Beta
Where to Find Beta

11. Basic Statistics
Frequency Distribution
Mean/Median/Mode
Mean Deviation
Variance
Standard Deviation

12. Excel and Statistics
Setting Up the Spreadsheet
Average, Median, Mode, and Standard Deviation
Understanding the Present Data
How Do You Know Which Stock to Buy or Short?
Charting the Data

13. Differential versus Ratio
Differential
Ratio

14. Applying Statistics to Pairs
Density Curve
Understanding the Data

15. Taking a Step Back for a Moment

16. Moving Averages and Normalized Standard Deviation
Standard Deviation
Differential Moving Average
Normalized Standard Deviation

17. Money Management
Why Money Management?
Psychology of Money Management
Understanding How Pairs Can Be Dangerous

18. Money Management II
Fundamental Principles
Know Yourself
The Plan

19. The Reality of Pairs
Do Pairs Really Work?
Trader or Investor?
Making the Style Work for You
Intraday Pairs

20. Trading an Actual Pair
Introduction
Trading Diary - The Beginning
Historical Time Line of Divergence Events

21. The Current Setup
Understanding Where the Pair Is Now
Anadarko Petroleum

22. Trading Diary

23. Correlating Stocks to Indices
General Electric and ExxonMobil
General Electric and the DIAMONDS
ExxonMobil and the DIAMONDS
The Three Wise Men

24. Option Basics - Scott P. Evans

25. Understanding Volatility
What Is Volatility?
Volatility Position Sizing in Your Spreadsheet
Volatility and the Individual Stock
Weighted Volatility

26. Understanding Volatility and Options
Speed and Option Premium
Option Strategies for Pairs

27. Using Technical and Fundamental Analysis with Pairs
Technical Analysis
Fundamentals
KBH Homes and Tol Brothers
Moving Averages and Support and Resistance as Stops

28. Assorted Advice to Assist Trading

29. The Monitor Sheet

30. Conclusion
The Market Bubble
Words of Caution
Last Words of Advice

Appendix I: Economic Indicator Summary
Appendix II: Web sites, Books, and Software

Endnotes
Glossary - Jonathan Crowell and with Additions from Andrew and Aaron Long
Index
About the CD-ROM