Rolling Spot Forex Definition – The Immediate Nature of the Forex Spot Market

March 3, 2012 by  
Filed under Forex Trading

Often times peoples expectations about financial markets can lead to frustration if and when they decide to take the plunge and test the waters of a trading market in particular. For many people it is somewhat surprising that the securities transactions you want to do are not immediate. The standard stock market operator does not usually offers such a quick response. This type of reaction is usually immediate preview of a spot market.

While certain securities and commodities are traded on a spot market the most popular of all the spot markets is Spot Forex. So  is the question many have is, what is a spot market ? A spot forex trade involves either buying or selling a forex pair at a current rate. This involves a direct exchange between to currencies. Such transactions involve cash as opposed to a contracts and interest is not included upon the agreed transaction. Should you keep positions open you need to get into these pairs.

From another perspective – The current definition of a spot market is a market where you buy goods or cash, and sell immediately. As with the stock market, you may want to buy or sell a particular action once they have placed in the order in which brokerage firm, is a certain amount of time it takes to execute the purchase or sale. During this time, the value of the stock could go up or down and these movements could dramatically affect the profitability of their operation.

Rolling Spot Forex Spot Forex Market is a horse of a different color. Spot Forex market is somewhat misleading, because that is the only market rate quoted on currency. This means that if you see a profit potential in a currency that link and you want to enter before price changes, all you need do is buy the pairing. Once you submit the order, your transaction will be immediately executed. On the contrary if the trade goes south in a hurry, you can stop the trade as soon as you entered.

Spot forex trading is done electronically. This is convenient and necessary. Convenient, because you can perform operations on your computer virtually anywhere, anytime, day or night, it is necessary, because the Forex market has no central trading floor to speak of. It is a 24-hour a day market. Regardless of why the spot Forex market is the way it is, the immediacy of this particular market is what makes it so appealing and so very popular. Rolling Spot Forex Definition

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Pairs Trading Strategy and Statistical Arbitrage

July 20, 2010 by  
Filed under Option Trading

Pairs trading strategy is a market neutral strategy which enables traders to profit from virtually any market condition; uptrend, downtrend or sidewise movement. Although introduced in early 1980’s the strategy became popular among retail traders only after the introduction of online trading though sophisticated trading systems. Opportunities of pairs trading usually last for only a short-period of time thus quick response to market movements is required, which can only be achieved by high degree of automation. The first and most important step in pairs trading strategy is to find pairs. Pairs are trading instruments (stocks, options, futures, currencies, bonds, etc. ) which show great correlation; that is the price of one move in same direction of the other. For stocks, pairs can be shares of two companies in same (or related) industry. For options, it can be options on highly related stocks. For futures it can be mini and full-size contract or can be futures of related (same) industries. And for forex it can be currencies of countries having good trade relations. Traders should use various fundamental and technical analysis tools to find these pairs. Once pairs are identified the strategy is simple. Pairs traders look for divergence of correlation between shares of a pair. When a divergence is noticed, traders take opposite positions for instruments in a pair. For stocks, currencies and futures, the trader takes long position for under performing instrument and short position for over performing instrument; for options, the trader writes put option for underperforming stock and call option for outperforming stock. In most cases cost of taking one position is compensated by the revenue from the opposite position. Trader is profited when the divergence is corrected and the instruments are brought to original (near original) correlation by market forces. Pairs trading strategy demand good position sizing, market timing and decision making skill. Although the strategy does not have not much downside risk there is a scarcity of opportunities and, for profiting, the trader must be one of the first to capitalize on the opportunity. Statistical Arbitrate, popularly called StatArb, is the broad scale application of Pairs trading strategy. The strategy is to profit from pricing inefficiencies in the market and to make profit by tracking divergences from correlation. But unlike pairs trading, the StatArb include downside risk. In statistical arbitrage, traders constitute portfolios consisting of a number of different stocks, which are carefully matched for reducing market risk and stock beta. Stocks are carefully screened using fundamental and technical tools; this includes industry, beta, volume, growth, value and performance history. Usually the stocks in the portfolio are scored using mean-diversion principle and other mathematical models. Usually the stocks which are underperforming receive high scores; and outperforming stocks receive low scores. The strategy is to take long position on high score stocks and take short positions on low score stocks. With both pairs trading and statistical arbitrage continuous data mining, market and price analysis and price matching are important. High position sizing, low trading costs and better trading platforms can offer better profits.

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