Last Updated on 30 January, 2023 by Samuelsson
Statistical arbitrage is a popular trading strategy used by many swing traders. It is a form of high-frequency trading where a trader takes advantage of small price changes in securities that are related in some way. This type of trading has been around since the early 2000s and is used by many professional traders.
What is Statistical Arbitrage?
Statistical arbitrage is a trading strategy that attempts to take advantage of small, temporary price discrepancies in related securities. This type of trading is based on the idea that two related securities will eventually return to their mean price or their long-term average price. By analyzing the differences between the current price of a security and its long-term average price, traders can attempt to identify opportunities to buy and sell related securities in order to make a profit.
How to Use Statistical Arbitrage in Swing Trading
Statistical arbitrage can be a powerful tool for swing traders. Here are a few tips for how to use it in your swing trading strategy.
1. Identify Marketable Pairs
The first step in using statistical arbitrage is to identify marketable pairs. This involves looking for two securities that have a high correlation and that have similar trading volume and liquidity levels. Once you have identified a pair that is suitable for statistical arbitrage, you can move on to the next step.
2. Monitor Volume and Liquidity
When using statistical arbitrage, it is important to monitor the volume and liquidity of the securities in your marketable pairs. The volume of a security is an indication of how actively it is being traded. The liquidity of a security is an indication of how easily it can be bought and sold. If the volume and liquidity of a security are low, it may be difficult to take advantage of price discrepancies in the pair.
3. Calculate the Spread
Once you have identified a pair and monitored their volume and liquidity, the next step is to calculate the spread. The spread is the difference between the current price of a security and its long-term average price. A wide spread indicates that there may be an opportunity to make a profit by buying and selling the pair.
4. Set Up Your Trade
Once you have identified a pair and calculated the spread, the next step is to set up your trade. This involves deciding on the size of your position, the entry price, and the exit price. It is important to set up your trade in such a way that you can limit your risk while still having the potential to make a profit.
Statistical arbitrage can be a powerful tool for swing traders. By following the steps outlined above, traders can identify profitable opportunities in related securities and take advantage of small price discrepancies. With the right strategy, swing traders can use statistical arbitrage to maximize their profits.