Understanding Pairs Trading Recommendations

pairs-trading tips

Clearnifty sends exclusive pairs trading recommendations to its premium users. If you want to become premium user, register on clearnifty.com and send an email to feedback@clearnifty.com

We will go over a recommendation by using one example. We sent a recommendation on 19th Feb 2013 of buying NMDC and selling HINDALCO.

Here is the recommendation:
Timeframe: 3months
Entry Threshold: 1.5
Target Divergence: 0
Stop Loss Divergence: -2.5
Current Divergence is: -1.45785
NMDC is trading at 137.25.
HINDALCO is trading at 98.85.

Whenever you receive a recommendation, visit the pair page on clearnifty.com. For example, in this case, visit NMDC-HINDALCO page.

How to calculate divergence

When doing pairs trading, you should understand what divergence is. (Read our earlier tutorial on pairs trading.) Simply put, divergence is a function of stock prices of constituent stocks in pair. In the above case, divergence is calculated using the folloing formula:

[hindalco_price - (0.8 * nmdc_price) - mean_error]/standard_error

Mean error and standard error are available on pair page.

Here is an explanation of terms:
Other things to keep in mind:

Hope this article clears some doubts about the terms used in recommendations. If there is any doubt, feel free to mail us at feedback@clearnifty.com

Good Trading!

Clearnifty Team.

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